There are only a few more weeks before the U.S. tax season.
The 2020 U.S tax season deadline has historically been April 15, but due to COVID-19, the official deadline to file tax returns is now July 15.
While the extension comes as a relief for many during this unprecedented time, do not let the COVID-19 extension lull you into complacency, as the Internal Revenue Service (IRS) has a spotlight on crypto tax this tax season.
When it comes to crypto tax, the IRS did not hold back this past year.
After announcing an International Compliance Campaign for cryptocurrency, the IRS published new virtual currency guidance in October 2019 and sent letters to crypto traders to check their tax reports. Recently, the IRS has even begun looking for a contractor to examine crypto tax reports submitted by American taxpayers, signaling that the IRS is going to take a careful look at the reports in both civil tax compliance aspects, and — as the last criminal investigation report mentioned — in criminal aspects.
So, now that we understand the importance of full and accurate reports, here are 10 tips for complete and accurate crypto tax reporting.
1. Before You Start, Collect All Your Data
This tip can save you a lot of time and frustration. The more thorough you are, the easier the next stages will be:
- Download all CSV files from all your crypto exchange accounts. Make sure you have the entire trading history, deposits and withdrawals.
- Make a list of all your crypto addresses from all of your wallets.
- If you received any income in crypto — collect all relevant records.
- If you received crypto as a gift, donated crypto, etc., collect those records as well.
- If you engaged in crypto mining, collect all the relevant data available.
- Collect all records from airdrops and forks you have received.
2. Establish an Accurate Market Value
According to the IRS guidance, if you receive cryptocurrency in a peer-to-peer transaction or traded on a non-facilitated cryptocurrency exchange, you need to establish an accurate fair market value.
The IRS will accept the evidence of fair market value from a blockchain explorer that calculates the value of the cryptocurrency at an exact date and time. Tax pros and crypto holders who do not use an explorer must establish the value as an accurate representation of the cryptocurrency’s fair market value.
This is why it is highly important to choose a reliable crypto ranking platform to establish the fair market value. For example, you can reference historical prices on CoinMarketCap to determine your cryptocurrency’s fair market value.
3. Pay Attention to Crypto Activity That Is Not Subject to Capital Gains Tax
Every activity is subject to different tax rules. For example, if you gave someone crypto as a gift, this is not a taxable event. If you donate crypto, you can get a deduction. Forks, airdrops and mining can be classified as income. Make sure you are classifying your digital currency activities with the correct tax definition.
4. Offset Your Capital Gains
Make sure to understand the IRS rules to calculate capital gains and losses. You can use capital losses to offset your capital gains as well as a portion of your regular income. You can carry over the loss to future tax years until it is exhausted.
5. Choose a Calculation Method
Based on your activity and prior reports, you can choose between different calculation methods:
First-In-First-Out (FIFO) Method — the sale cost associated with the coin that was purchased first is the cost of the coin that you sold first. It does not necessarily mean that the exact coin has been sold.
Specific Identification Method — identifies the exact coin that the user sold and calculates their tax liability on the sale of the actual coin based on the blockchain evidence.
You can save a lot of money by choosing the right method for you.
For example, if you got into crypto early and traded over the years when prices went up, specific identification may be the right method for you. If you bought your first crypto in late 2017 and since then only sold a few times when the price was at its lowest, consider using the FIFO method.
The IRS guidance instructs you on how to perform specific identification and determines that if you cannot specifically identify your crypto, you should use the FIFO method.
6. Do Not Attempt to Use Like-Kind Exchanges
The IRS clearly states that like-kind exchange treatment applies to real property and not to exchanges of personal or intangible property.
7. Use the Right Crypto Tax Calculation Platform
Choose a platform that will make sure you have a full report, alert you of missing information, help you understand what the right calculation method for you is and meet all IRS requirements.
8. Understand Which Tax Form Is Applicable for You
If you have capital gains, use Form 8949, Sales and Other Dispositions of Capital Assets, and then summarize capital gains and deductible capital losses on Form 1040, Schedule D, Capital Gains, and Losses.
If you need to report an ordinary income from crypto, use Form 1040, U.S. Individual Tax Return, Form 1040-SS, Form 1040-NR, or Form 1040, Schedule 1, Additional Income and Adjustments to Income (PDF), as applicable.
9. Save All Your Documentation
When compiling a report and filling out the appropriate documentation, taxpayers must report all income, gains and losses incurred by all taxable transactions, regardless of the amount. IRS codes and requirements mean that taxpayers must maintain thorough documentation on receipts, sales and exchanges in order to establish validity on their tax returns.
10. If You Are Not Sure You Calculated Accurately, Consult a Tax Professional
This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice.
The views and opinions expressed in this article are the author’s own and do not necessarily reflect those of CoinMarketCap.