As tax season nears, Americans prepare for filing payments and returns. It’s also a time to maintain fresh financial records for the upcoming year. Amid these activities, individuals who transacted with cryptocurrencies were required to provide pertinent data for over 14,000 customers involved in transactions exceeding $20,000 in bitcoins (BTC) between 2013 and 2015. Those who foresaw Uncle Sam’s readiness to examine and impose the necessary taxes and penalties on bitcoin exchanges were indeed correct. On July 26, 2019, the federal authority announced plans to dispatch educational letters to 10,000 taxpayers suspected of failing to report and pay taxes from virtual currency transactions or not doing so accurately.
IRS Commissioner Chuck Rettig emphasized the importance of these letters, urging taxpayers to seriously review their filings and amend past returns, paying any back taxes, interest, and penalties if needed. “The IRS is broadening its efforts regarding virtual currencies, increasing data analytics usage. We aim to enforce the law and aid taxpayers in comprehending and fulfilling their obligations,” he stated in a press release.
For some cryptocurrency enthusiasts, these developments may have been unexpected. However, it is crucial to acknowledge that taxes are inevitable, regardless of the transaction type or asset class.
Consider some essential aspects that assist in preparing tax returns for those engaged in buying or selling cryptocurrencies.
Numerous brokers, intermediaries, and exchanges facilitate cryptocurrency trading. Yet, they are not duty-bound to provide tax reports to participants, though some might choose to do so. For example, Coinbase issues a “cost basis for taxes” report.
Ultimately, maintaining crucial records of one’s cryptocurrency transactions remains the individual’s responsibility.
Suppose six months ago, you acquired 10 bitcoins priced at $3,000 each or received them as payment for services rendered. Presently, these bitcoins might value $9,000 each, indicating a $6,000 potential profit per coin.
Keeping records that demonstrate receiving bitcoins at the $3,000 valuation, confirming a net income of $6,000 per coin, is your duty. Without such documentation, your holdings might be evaluated at $9,000 each, significantly inflating your tax responsibilities.
Any bitcoin transaction might entail tax obligations. For instance, suppose you acquired five bitcoins five years ago, used one at a café four years back, spent another two purchasing items online three years ago, and sold the remaining two for equivalent dollar value a month ago. It’s expected that for each transaction, you maintain the dollar equivalent value for accurate net dollar income calculation from bitcoins. Your tax liabilities will be assessed based on these calculations.
Filing bitcoin income is crucial, and individuals should diligently keep transaction records, ready themselves for audits, tax payments, or potential penalties.
Engaging in cryptocurrencies and Initial Coin Offerings (“ICOs”) involves high risks and speculation. This article does not serve as an endorsement by the author or the publication to invest in cryptocurrencies or ICOs. Every person’s circumstances are singular, and seeking advice from a professional is prudent before making any financial decisions. No guarantees are made regarding the accuracy or timeliness of the presented information.
Understanding the taxation of various cryptocurrency dealings is vital for correct record maintenance. Depending on the bitcoin transaction type, here are scenarios to consider for tax filing:
Bitcoins received as payment for goods or services are taxed as ordinary income, requiring declaration at their fair market value on the transaction date. Federal taxes may range between 10% and 37% on such income, treated as regular income.
When bitcoins are purchased as investments and sold profitably, taxation depends on the holding period. Short-term holdings under a year classify net earnings as ordinary income, potentially attracting state income tax. Long-term holdings over a year count as capital gains, possibly incurring an extra 3.8% net investment income tax.
Donating cryptocurrencies like bitcoin or ethereum to eligible charities may reduce tax liabilities.
For example, Fidelity Charitable fund received bitcoin donations worth about $69 million in 2017. The fund promptly sells received bitcoins on the Coinbase exchange, investing the dollar proceeds as the donor wishes, who earns a tax deduction that year.
Donations qualify for deductions only when made to eligible charities, unlike selling tokens and donating equivalent dollar amounts. Additionally, only individuals who itemize their tax returns can claim such deductions.
Similar to stock investment tax regulations, cryptocurrency losses can offset capital gains, subject to specific rules. Unused losses offset against gains allow deductions up to $3,000 from other income types, with loss carryforward provisions included.