Table of Contents:
- Tax Basics
- Fair Market Value
- Investing, Trading & Capital Gains
- Investing through Retirement Accounts
- Mining, Forks & Ordinary Income
- Lost or Stolen Crypto
- Foreign Accounts
- Tax Reform
- Tax Payments
- Gifts & Donations
- How Visor Works for Crypto Investors
1. How are cryptocurrencies taxed?
Cryptocurrency can be taxed in several ways depending on how a person uses the crypto.
If you hold the cryptocurrencies for investment purposes, then cryptocurrencies are taxed similar to stocks. We measure your gain or loss each time you sell, trade, or exchange cryptocurrency. Short-term gains (on cryptocurrencies owned for one year or less) are taxed at ordinary tax rates. Long-term gains (on cryptocurrencies owned for more than one year) are taxed at the long-term capital gains rates of 0%, 15% or 20%.
If you are in the trade or business of mining cryptocurrency, then your cryptocurrency is taxed as ordinary income subject both to ordinary tax rates and to the self-employment tax. You can also deduct any expenses related to your crypto activity.
If you accept cryptocurrency as a method of payment in your trade or business, then your cryptocurrency is treated just like any other income. It’s added to your gross business receipts and included as part of your business income.
2. How does the Internal Revenue Service treat cryptocurrency?
In 2014, the IRS published Notice 2014-21. Highlights include:
- Cryptocurrencies are treated as property and are therefore taxed as capital assets.
- Gains from selling cryptocurrency are subject to capital gains tax.
- Cryptocurrencies that are obtained from mining are taxable as income at their fair market value at the time they are received.
- Mining equipment can be deducted.
- Fair market value is determined by exchange rates.
3. What typically triggers a taxable event?
Taxable events include:
- Selling cryptocurrency for dollars (or some other national currency);
- Exchanging cryptocurrency for another type of cryptocurrency;
- Using cryptocurrency to buy a good or service;
- Receiving cryptocurrency as payment for services or goods;
- Receiving cryptocurrency as a result of a fork or from mining.
- Donating cryptocurrency to charity (this is treated as a tax deduction).
On the other hand, the following are generally not considered taxable events:
- Buying cryptocurrency with dollars;
- Transferring cryptocurrency from one wallet that you own to another wallet that you own, or from one exchange to another;
- Giving cryptocurrency to anyone (although if the gift is sufficiently large it may trigger a gift tax disclosure).
4. What if I traded one type of cryptocurrency for another type of cryptocurrency?
This is a taxable event. The trade is handled as if you sold your cryptocurrency for cash and then bought the new coin with that cash.
Example: you sold Bitcoin and bought Ethereum. That is treated as a sale of the Bitcoin and a subsequent investment into Ethereum.
5. If I buy a good or service with cryptocurrency, is that a taxable event?
Yes, this is a taxable event. The transaction is handled as if you sold your cryptocurrency for cash and used the cash to purchase something.
6. By accident, I did not properly report cryptocurrency on my tax return in previous years. What should I do?
We advise you to amend your previous tax returns to include your cryptocurrency transactions. Visor can help by preparing your amended returns, and making sure your returns processed correctly by the IRS. Our fee for preparing an amended return is $799 per year.
7. For 2017 taxes, I was advised to file an extension and wait for further IRS guidance. Do you agree?
We do not agree with this advice. The IRS has already provided guidance in Notice 2014-21. The IRS does not plan to offer additional guidance for cryptocurrency in the first half of the year 2018. Accordingly, we do not think there will be any new guidance that will impact how we report your cryptocurrency for year 2017 taxes.
8. How can I reduce how much tax I pay on my crypto?
Visor can help you plan out your 2018 taxes to minimize how much tax you pay on your cryptocurrency.
FAIR MARKET VALUE
9. How do I know the fair market value of my cryptocurrency coin?
Fair market value is the price someone would pay for something. The IRS says fair market value, “is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”
Because crypto is so widely traded, the best practice is to find the exchange where you do the most trading or the exchange that does the most trading for that coin, and use that exchange’s published rates to figure out the fair market value of that coin on a particular. The key is to be consistent, and use that same exchange’s published rates every time you need to figure out market values.
INVESTING / TRADING / CAPITAL GAINS
10. What is my tax rate for my crypto gains?
The tax rate on capital gains varies based on how long you held the coin before selling.
If you held the cryptocurrency for one year or less, these are considered short term capital gains. Short-term gains are taxed at your ordinary income tax rate. For 2018, ordinary tax rates range from 10% on the low-end to 37% on the high-end.
If you held the coins for more than one year, they are considered long term capital gains. Long-term gains are taxed at lower rates of 0%, 15% or 20%.
The specific tax rate depends on the amount of other income you have. Your tax advisor can further explain which tax rate applies to your trades.
11. What methods do I have for calculating my capital gains?
Capital gain is the difference between the price for which you sold a coin and your cost basis in that coin. Cost basis is the price you paid to buy the coin. For cryptocurrency, you must use the specific identification method for determining cost basis and capital gain. You have to identify which asset you sold at which time. You must specifically state which crypto coins you sold when figuring out your gains and losses.
Most capital gain tracking software for cryptocurrencies, such as bitcoin.tax or cointracker.io, can calculate your crypto gains using approved IRS methods.
Our tax advisors will help you figure out the best way to measure your cost basis and capital gains.
12. Can I apply a 1031 like-kind exchange to my cryptocurrency trades?
Probably not. Visor believes, along with most other tax experts in the crypto space, that 1031 like-kind exchange rules do not apply to cryptocurrencies.
To be a valid like-kind exchange, two (or more) pieces of property must be simultaneously exchanged, and the property given up and the property received must both be held by the client for investment use or for business use. Additionally, both properties must be of a similar nature or kind to each other.
Starting with the year 2018, like-kind exchanges only applies to real estate.
Your tax advisor can explain further.
13. Do wash sales apply to cryptocurrency?
No, the wash sale rule does not apply to crypto trading.
You can read more about this topic here: Tax Rules for Cryptocurrency Losses.
14. How do capital gains from crypto impact the rest of my tax return?
The gains from the sale, use and exchange of cryptocurrencies are subject to capital gains tax. The gains and/or losses from crypto are combined with the gains and/or losses from your other taxable investments, think Facebook stock held in your Ameritrade or Fidelity account. If the netting ends in a gain it is combined with your other income. This increase in gain could shift you into a higher income tax bracket.
If I am in the 25% tax bracket with my normal income, will my gains from cryptos push me into a higher bracket?
15. How are short-term capital gains taxed?
Short-term gains are added to the rest of your income and taxed at your ordinary tax rate. So if you are in the 25% tax bracket, your short-term gains will be taxed at 25%.
16. Does my crypto accounting method (e.g. FIFO, LIFO, HIFO) have to be applied consistently each year?
For cryptocurrency, the only accounting method possible is the specific identification method. Under that method, we identify exactly which coins you are selling, and use the cost basis associated with those coins. This specific identification method must be used consistently each year.
When utilizing the specific identification method, we need to develop a plan for selling the cryptocurrency. Perhaps this year, selling your oldest crypto holdings might be our strategy (that is, to mimic FIFO). And perhaps next year, we will focus on selling your most recent crypto holdings (that is, to mimic LIFO). The key to this flexibility is always picking the right coin to sell, and this needs to be done before you sell, so you know which of your coins (and its associated cost basis) you are selling.
17. Is the maximum capital loss deductible on each tax return $3,000, even if married filing jointly?
That’s right. If your net capital gain is a negative number, you have a net capital loss for the year. Up to $3,000 of that net capital loss is deducted against your other income for the year. This $3,000 limit is the same for single people and for married couples who file jointly. There is a smaller $1,500 limit for married couples who file separately.
18. When you commingle your coin purchases in one wallet and then later in year sell some coin – can you use average cost or can you state that the coins are from lot X of your choice? In stocks, you have to write the broker to specify the lot to sell. In crypto work, you hold so you have to pick. But when commingled all in one wallet you have to have detailed records of what they are. So can you still make your own decision on what “lot” those coins sold are?
Yes, you can commingle coins and still choose what “Tax Lots” that are sold.
19. Is the IRS expecting traders to report each transaction for 2017? Since the new tax reform doesn’t start until 2018, can I just report my fiat investment into Coinbase and the proceeds from whatever was withdrawn from Coinbase in 2017?
Yes, you must report each sale, trade, exchange or other disposition of your cryptocurrency.
The short-cut you mentioned (just reporting how much cash you put into your Coinbase account, and however much cash was withdrawn from your Coinbase account) will not produce an accurate measurement of your gains for the year.
There are no shortcuts. Your 2017 tax return should reflect all income, gains, losses, deductions and credits — that way your tax return will be a complete and true picture of your finances for 2017.
20. I’ve bought and sold coins within Coinbase, but I have yet to withdraw any dollars from Coinbase to my bank account. Do I need to report and pay taxes for 2017?
Yes. You bought and sold coins. Those are taxable trades. You need to report those trades and pay taxes on the gains. The fact that you have not withdrawn any dollars from your crypto account to your bank account is not a relevant factor.
INVESTING THROUGH RETIREMENT ACCOUNTS
21. What should I know if invested in crypto assets through my Individual Retirement Account (IRA)?
You must avoid certain types of prohibited transactions. Engaging in a prohibited transaction at any time during the year results in the entire account being treated as if it is no longer an IRA as of the beginning of the year. This results in the entire account balance being considered distributed to you as taxable income. If you are younger than age 59 and a half years old, you will also be subject to a 10% surtax for early distributions.
Prohibited transactions inside an IRA include:
- Borrowing money from your IRA,
- Selling property to your IRA,
- Pledging your IRA as security or collateral for a loan,
- Buying property for personal use with your IRA funds.
Additionally, you cannot utilize any of the crypto funds sitting in your IRA to invest in prohibited asset classes such as collectibles, artwork, rugs, gems, stamps or certain types of precious metals.
We advise you to read the guidance from the IRS in Publication 590-A, Contributions to Individual Retirement Arrangements, especially the section in the first chapter that discusses “What Acts Result in Penalties or Additional Taxes?”
MINING / FORKS / ORDINARY INCOME
22. How do I report mined cryptocurrency?
Report your mined coins as taxable ordinary income. Their value is measured on the day you receive the coins. This amount becomes your basis in the coin.
You can deduct expenses directly related to mining cryptocurrencies, such as the the cost of mining rigs.
We need to determine whether your mining activity is a hobby or a business. Your tax adviser will help you with that analysis.
23. What happens if I receive a coin from a fork?
There is some debate about how to treat forked coins.
The most conservative and sensible approach is to report the fair market value of the cryptocurrency received in the fork as additional income subject to the ordinary tax rates. This approach is consistent with the well-established tax law that income is taxable at the time when you take possession of the income.
So for example if you own one bitcoin (BTC) and it forks into one bitcoin (BTC) and one bitcoin cash (BCH), then the one BCH you receive needs to be reported as taxable ordinary income (not a capital gain). This is true whether or not you sell your BCH. In addition, the amount you use for your reported income becomes your basis for the new BCH, and is what you will use to calculate any capital gain or loss when you eventually sell it.
Your tax advisor can help you sort out this issue.
24. How are cryptocurrencies taxed if I earn them?
Cryptocurrency received as payment for goods or services is taxable income. This is the same result as if you got paid in dollars.
For example, if a customer paid you one bitcoin, and one bitcoin was valued at $1,000, then you would be taxed as though you earned $1,000 of income.
25. What happens if my coin or token becomes worthless?
You can report as a loss any assets that become worthless. The amount of your loss is the amount you paid for it.
26. What if I lose my cryptocurrencies? What if my crypto is stolen by a hacker?
In the unfortunate situation that your crypto is lost or stolen, you may be able to claim an itemized deduction for the loss. The amount of the deduction is based on your original cost basis in the crypto.
27. What if I use a crypto exchange outside the United States?
You may need to file a Foreign Bank Account Report and a Statement of Foreign Financial Assets. These forms disclose the existence of any accounts you have with foreign banks, foreign brokers, and foreign retirement accounts, and other types of financial accounts that are located outside the United States.
You must file a Foreign Bank Account Report if the highest account balance — across all your foreign accounts — is at least US$10,000 at any point in the year.
You might need to file a Statement of Foreign Financial Assets if the highest account balance — across all your foreign accounts — is at least US$50,000 at any point in the year.
- For additional details, please see Foreign Bank Account Requirements.
28. How do I know if my crypto exchange is foreign?
Read through your account agreement and the terms and conditions. What you are looking for is the address where the exchange is located.
29. Which tax forms do I need to report cryptocurrency?
This will vary, and your tax advisor will figure this out based on your specific investment activity.
Typically, you will need Form 8949 and Schedule D to report the gains and losses on your cryptocurrency trades.
You may also need Schedule C to report mining income and related expenses.
And you may need to file a separate Foreign Bank Account Report if you have a cryptocurrency account with exchanges located outside the United States.
There might be other forms needed, depending on the specifics of your situation. Your tax advisor will figure this out based on your specific investment activity.
30. I got a 1099-K from Coinbase. Why is that and what do I do? I didn’t even invest the $20,000 minimum. The number reported is also more than I even invested.
The amount reported on your Form 1099-K from Coinbase represents the gross proceeds from the sale of cryptocurrencies on the Coinbase exchange. Your tax adviser needs this Form 1099-K along with a gain/loss report so that your actual income from crypto trades can be measured and reported on your tax return.
31. Anything else from the new tax law besides the stricter 1031 exchange that will impact the crypto market?
Yes. As you mentioned, the Tax Cuts and Jobs Act made it clear that the use of like-kind exchanges is solely applicable to real estate starting in 2018.
Additionally, we can no longer deduct expenses for investment expenses and advice starting in 2018. This includes not just fees for financial planning, but also subscriptions for investment advice and research services.
Plus, there are new tax rates, and this will impact how much tax we pay on crypto gains.
32. Do I need to pay tax on my cryptocurrency?
Yes. If you traded, sold, or used any of your cryptocurrency to purchase something, then you likely need to pay capital gains taxes on these transactions.
33. Do I have to make quarterly tax payments on my crypto?
Yes. We advise you to make estimated tax payments. Estimated tax is required if a person is earning income and no tax is being withheld, and you expect this income to trigger at least $1,000 of additional tax liability. Estimated tax payments are due four times a year.
34. How often are cryptocurrency taxes due?
Estimated taxes are due on April 15, June 15, September 15, and January 15.
35. I have yet to sell any crypto for fiat, only for other coins. How do I afford the tax bill?
You will need to generate the cash sufficient to pay your taxes. You might have to work over-time or cut back on your spending. You might even have to sell some of your crypto to pay the tax bill. You can also set up a payment plan to pay your tax bill over time.
We recommend that clients take into account the potential capital gains tax every time they trade crypto for other crypto. The government requires you pay the tax, and there is no relief just because you haven’t actually converted any of your investments back to dollars.
36. Is there a tax deduction for fees charged to transfer crypto from one wallet to another wallet?
Transfer fees would be included in the cost basis of that particular coin.
37. I paid for a subscription to investment research, specifically Palm Beach Confidential. Can I deduct that?
Yes. For 2017, you can deduct the cost of subscribing to magazines, newsletters and research services providing investment advice and research. If you are a regular crypto investor, this investment expense is a miscellaneous itemized deduction. The amount you can deduct is limited. Starting in the year 2018, the miscellaneous itemized deduction for investment expenses goes away, and so the subscription would no longer be deductible.
If you are in the trade or business of mining and trading crypto, however, then you deduct your investment advice as a business expense.
GIFTS / DONATIONS
38. What if I donate my cryptocurrency?
If you donate your cryptocurrency to charity, you do not pay capital gains on the transaction. You also get a deduction for the value of your donation.
39. What if I give or receive cryptocurrency as a gift?
Giving cryptocurrency as a gift is typically not a taxable event for the donor. In some circumstances, the donor may need to disclose the gift on a gift tax return. Your tax advisor will let you know if this applies to your situation. You also need to tell the recipient of the gift what the cost basis in that cryptocurrency.
If you receive cryptocurrency as a gift, you will need to know the cost basis of the cryptocurrency from the donor. That’s the cost basis you will use to measure your gain when you eventually sell the cryptocurrency.
HOW VISOR WORKS FOR CRYPTO INVESTORS
40. Do you calculate my capital gains?
Unless you only have a couple transactions, we recommend that our clients utilize a third party service to generate a report of your cryptocurrency gains.
41. What’s the process of sharing my Bitcoin.tax data with Visor?
There are two easy ways to do that.
If you’re already done and have downloaded your reports from bitcoin.tax, then simply upload both the CSV and Form 8949 to Visor.
Alternatively, you can link your account within Bitcoin.tax to Visor’s master account. After that, your Visor tax advisor will have access to your data and reports.
42. What’s the process of sharing my Cointracker data with Visor?
Once you’re done setting up all your transactions in Cointracker, download the CSV report and Form 8949 from Cointracker, and then upload these same files to Visor.
If you have questions, your tax advisor can help.
43. Do you help review my capital gain reports / Form 8949 that Bitcoin.tax / Cointracker generated?
Yes, Visor will review your capital gains report, but we will not audit or verify your capital gains report.
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