The basics to keep in mind when filing your tax returns involving cryptocurrencies this year.
From the CMC Editorial Desk: It’s… taaaax season. Before you panic, what do you need to know as you’re filing returns on your crypto? Find out more about the current landscape, trends and to-dos in this article.
With all the excitement and opportunities around cryptocurrencies, it might be easy to forget about crypto taxation. According to Uncle Sam, cryptocurrencies are classified as property. This means just about every virtual currency transaction from mining, spending to trading and exchanging cryptocurrencies, are taxable events for U.S. tax purposes.
With cryptocurrencies’ value constantly
changing, keeping track of all that data could be a nightmare come tax time.
From 2013 to 2015, less than 900 people
each year reported Bitcoin transactions to the IRS. That’s out of millions just
counting the number of users on Coinbase alone.
While paying taxes can at times be painful,
it is very important that you include your crypto-trading activity with your
tax return. A lot of traders are convinced that because of the anonymous,
decentralized nature of Blockchain and cryptocurrency transactions, that there
is no way for the government to know about their cryptocurrency transactions.
Unfortunately for these people, this is
just not true. The Blockchain is a distributed public ledger, meaning anyone
can view the ledger at any time. Documenting and understanding an individual’s
activities on that ledger comes down to associating a wallet address with a
If you choose not to file your gains and losses,
you will be committing blatant tax fraud to which the IRS can enforce several
penalties, including criminal prosecution, five years in prison, along with a
fine of up to $250,000. Below are charts for both long-term & short term
capital gains for your reference:
for Regulatory Clarification
The first IRS tax guidance for
cryptocurrencies was introduced March 2014. Various professional, regulatory
and governmental bodies have expressed needs and concerns to the IRS related to
clarification regarding the existing tax regulations for cryptocurrency.
The AICPA, which is the world’s largest
association of accounting professionals, asked the IRS to issue immediate,
updated guidance regarding the tax treatment of cryptocurrency transactions
early in 2017.
The American Bar Association of Taxation
has also formally asked the US Internal Revenue Service to create a safe harbor
for investment gains realized from cryptocurrency hard forks.
Even members of the Senate Finance
Committee and the House Ways and Means Committee sent a letter to the IRS
requesting that it clarify the rules on cryptocurrency taxes and clarification
as to why it issued a broad summons for Coinbase user data in 2016.
Rather than release any further guidance,
the IRS has focused on enforcement actions around the preliminary rules
released during 2014.
John Doe Audits
The IRS has demonstrated it intends to
enforce existing 1099 reporting rules on cryptocurrency exchanges, but it has
not followed up by providing clarity regarding those rules.
The IRS has already forced Coinbase and
Gemini to report users on form 1099-K.
The 1099-K lacks the cost basis details
required to capture an accurate capital gain and loss calculation that would
determine taxable income for the IRS. This is because 1099-K’s do not report
the relevant cost basis data necessary to accurately calculate capital gains
and losses. Additionally, this form does not reconcile trades across multiple
This is why investors are turning to
experienced cryptocurrency CPAs for assistance for accurate portfolio
calculations, tax filings and advisory related to documentation and future tax
For Tax Enforcement
Late last year, America, the U.K., Canada, Australia, and the Netherlands formed an International Task Force called the Joint Chiefs of Global Tax Enforcement with the goal of sharing intelligence to track down tax evaders. Their specific targets include offshore accounts and cryptocurrencies.
The Australian Tax Office has also recently
warned Australians to declare their annual returns from virtual currencies.
This is something like what other regulatory agencies are doing around the
The tax-collection agency of Israel isalready
actively targeting cryptocurrency traders and investors in in order to reduce
tax evasion. Some of the measures taken include sending notice letters to
individuals suspected of not reporting their earnings from cryptocurrency
It is clear that cryptocurrency has been on the radar of governments around the world.
With that in mind, a document has been
signed by those in attendance at the most recent G-20 conference agreeing that
the member countries will come together on the issue of cryptocurrency taxation
with final plans set to be revealed in 2020.
Future Crypto Tax Trends
It is clear that both the United States and
international tax agencies have prepared for enforcement against non-compliant
cryptocurrency investors and in some cases, this has already been implemented. We
expect to see this trend increase in the future. There have been indications
that countries will attempt to work together to internationally enforce
compliance across exchanges and investors.
In the future we may also see social media
increasingly used to catch tax evaders. According to the IRS’s National Office
of Procurement, the agency is planning to analyze social media platforms to
catch tax evaders.
It is highly likely that soon the IRS will
include a question on form 1040 like the questions regarding offshore financial
accounts. This would require taxpayers each year to check a box denoting
whether they traded or owned cryptocurrencies during the taxable year. This
would also require people to certify on their tax return explicitly whether they
Eventually we may see court cases that can
dictate future treatment of certain scenarios such as like-kind exchanges. A
like-kind exchange under United States tax law, also known as a 1031 exchange,
is a transaction or series of transactions that allows for the disposal of an
asset and the acquisition of another replacement asset without generating a
current tax liability from the sale of the first asset. As a result of future
enforcement actions and clarification of reporting requirements, we also expect
a higher level of compliance across investors in the future.
Investors Need To Do To Protect Their Assets
Learn The Rules Before You Play The Game
According to the IRS, like-kind exchange
rules have not been explicitly permitted for cryptocurrency trades. Since
cryptocurrency was designated as property in 2014 by the IRS with no
stipulations for like-kind exchanges every crypto transaction is taxable.
All too often, I meet new potential clients
at Camuso CPA that are actively investing in cryptocurrency who are not aware
of the tax implications as they relate to their portfolio. This can lead to
negative results such as not planning properly for tax liabilities.
Investors may be forced to liquidate a
large portion of their portfolio in a bear market to cover tax liabilities
imposed on large volumes of active trades made during a bull market. Investors
may also, leave money on the table by not optimizing their portfolio for taxes
during bear markets. Be sure to deeply consider the tax implications to any
investment, trading or business decision.
Record-keeping is Key
Due to the tax implications surrounding cryptocurrency, the nascency of the asset class along with the general nature of cryptocurrency, proper record-keeping is of the highest priority when preparing documentation for tax purposes.
Most cryptocurrency exchanges are currently
operating in a regulatory gray area. We recommend that taxpayers download their
transaction histories from every exchange that they had activity on for the
applicable tax years.
Unfortunately, it is very common to see new
clients who do not have access to all their relevant exchange and non-exchange
data due to various circumstances such as exchange shut downs, lack of data
reported by exchanges or other related scenarios. For these reasons, I
recommend downloading all the relevant data outlined on a quarterly basis.
Work With An Experienced Crypto CPA
The IRS established a broad tax policy that
includes extensive reporting requirements for taxpayers. Many cryptocurrency
traders, investors and miners are facing some of the most challenging tax
seasons of their lives.
When it comes right down to it, there is
nothing that can replace good professional advice. Any CPA firm that a
cryptocurrency investor chooses should be able to demonstrate that they are
knowledgeable in cryptocurrencies and financial services, not just hopping on
the latest trend like many CPA firms and franchise organizations.
A professional cryptocurrency CPA can
ensure you protect your crypto assets from Uncle Sam, can put your mind at ease
during tax season, and even save you some money. While there are some helpful
online tools that you can use to help you prepare this tax season, they don’t
provide everything you need to accurately file your cryptocurrency taxes.
sure you stay up to date on the latest changes
The cryptocurrency tax landscape is rapidly
developing much like the overall industry, and the pace of that change is
faster now than at any time in previous years.
Tax planning and compliance for
cryptocurrency are evolving, and increased tax authority scrutiny will cause a
jump in the number and size of cryptocurrency tax audits and assessments in the
Investors and businesses who work to make
sense of the shifting cryptocurrency tax landscape must remain
diligent in staying up to date on the latest developments in IRS legislation
and tax treatments surrounding various forms of cryptocurrency transactions.
Patrick Camuso, CPA is founder and owner of Camuso CPA, a CPA firm serving cryptocurrency investors, miners and businesses nationwide. Camuso CPA was the first CPA firm in the country to accept cryptocurrency as a form of payment for professional services. Camuso CPA works with investors and businesses on cryptocurrency portfolio tax analysis, tax preparation and tax planning.