The Next Month Will Be Flooded with Bitcoin Tax Related Tips and IRS Guidelines
The new tax season is about to arrive, and while this is hardly anyone's favorite time of the year — there are things that need to be said, and particularly the things that cryptocurrency users need to hear.
While many of the crypto investors who entered the space early probably already know how to deal with cryptocurrency-based taxes, those who joined the crypto trend in late 2017 and early 2018 might still be confused regarding what is expected of them. When it comes to crypto, the tax season might even end up being quite challenging.
The crypto industry is still struggling to get proper regulations, and with no functioning framework, everything is submitted to change. The regulators seem to constantly announce new things, as the regulations are being developed. Meanwhile, the April 15th deadline comes closer and closer.
And, while it is unlikely that the Congress will pass a new crypto taxation legislation before this time, coin holders will simply have to find a way to work with the current policies of the IRS. The situation was made even more difficult due to the government shutdown, which has been proclaimed the longest in the country's history.
Meanwhile, the IRS itself failed to provide any definitive guidelines regarding the taxes. Even so, their stance on the matter is clear, and it may serve as a base that might guide crypto investors.
Cryptocurrencies Are Considered Property By Tax Collectors
The first thing to understand is that IRS views cryptocurrencies as property, instead of an actual currency. As a result, they believe that cryptos are subject to the same tax rules that include regular types of property, such as stock and alike. In other words, crypto investors and traders need to report any profits they made during investing and trading as capital gains (losses).
According to some estimates, crypto investors had over $1.7 billion in realized losses. While this may serve as a way of reducing the height of their taxes, the trouble lies in the fact that most of them do not know how to report this, or even that they should report it.
In addition, coin holders should know that the IRS makes a difference between short-term and long-term capital gains and losses, based on how long does each individual keep their assets. However, if someone bought cryptocurrencies in cash, but did not decide to sell them, and is instead HODLing, this is not considered a taxable event.
On the other hand, if cryptocurrency is bought through the use of another cryptocurrency, that is a taxable event, as the first coin needs to be sold in order for the second one to be bought.
While only a small number of crypto traders and investors reported their crypto holdings last year, this will likely change due to the crypto winter which caused a lot of losses. As mentioned, these losses can be used for reducing taxes. Meanwhile, it is advised that they do report their crypto holdings in any case, as blockchain analysis tools evolved drastically in recent years, and the IRS now works with blockchain forensics agencies to determine the situation of each coin holder.
It should also be mentioned that Coinbase, the largest US-based crypto exchange, recently faced a lot of criticism for acquiring a controversial firm Neutrino. Due to the high amount of negative publicity, the exchange is unlikely to cause additional troubles for itself by trying to avoid reporting crypto holdings of its users.
What Does This Mean For Taxpayers?
The first thing to note is that the IRS' decision to view crypto as property means that the only taxable events are the sale of cryptos and the coins' use in purchasing goods and services. Meanwhile, simply sending coins between wallets does not count as a taxable event.
Next, it is also important to note that Bitcoin is pretty much the only cryptocurrency with precisely identified tax specifications. As a result, the IRS demands that all acquisitions of Bitcoin (through trading, mining, or as payment in exchange for goods/services) must be converted to the US dollars and reported as income.
Anyone unsure of how to go about filing their taxes should consult a tax professional, preferably one with experience in crypto taxation. Other than that, they can also use online tools and other resources that can assist in filing taxes.
The most important thing is to file your taxes honestly, as not doing so may lead to troubles with the IRS in the future. Even those who use privacy coins such as Zcash, Monero, and other anonymous cryptocurrencies should know that these coins are not completely anonymous and that there are holes that the IRS will likely discover sooner or later.