Many cryptocurrency investors were caught off guard when the IRS started cracking down on unpaid virtual currency gains last year. Attracting the attention of the IRS auditing department is never a good idea, so make sure you start off this year with good tax planning.
When it comes to effective tax planning, nothing beats the advice of a qualified professional. While many of us are used to going at it alone each tax season, tax returns get complicated quickly when you’re reporting cryptocurrency trading activity. This is particularly true for high-volume coin traders, who may be facing huge disclosure requirements on thousands of reportable crypto trades. Fortunately, Happy Tax is here to help. Happy Tax customers are connected with trained cryptocurrency tax experts who can help you prepare your returns easily and painlessly this tax season. Here are a few tips to help you get ready for your first discussion on tax preparation for 2018.
Keep Good Records
When you submit your tax returns, you swear to the accuracy of the documents under penalty of perjury. So, if you get questions from the IRS or requests for documentation, you had better be prepared! If you haven’t kept meticulous notes about every trade you performed last year, don’t worry. Most exchanges let you export your account activity to an Excel spreadsheet or PDF.
But be forewarned – just looking at these documents may make your head spin. And when it comes to trying to figure out what you need to calculate your cryptocurrency taxes from your raw account data, you may start getting waking nightmares of high-school algebra class.
Keeping good records is an important first step to effective tax preparation. However, the story doesn’t end there. Be sure that all of your financial information is accurate and up-to-date, and then contact a professional cryptocurrency accountant to help you make sense of it all.
Plan Your Sales
With the recent cryptocurrency market performance, you may be sitting on some profitable virtual coins. In such a speculative investment environment, it’s very tempting to sell as soon as you see some profit. However, how much you pay in capital gains on your cryptocurrency income partially depends on how long you held the asset before you sold it. This is due to the difference in the tax rate between short-term capital gains and long-term capital gains.
If you held a cryptocurrency asset for less than one year before selling it or swapping it for a different virtual currency, you are taxed at your ordinary income tax rate. This may be good or bad, depending on how much taxable income you had last year. However, if you hold these assets for more than one year before selling or trading them, you will be taxed at the long-term capital gains rate. Long-term capital gains tax is usually lower than short-term capital gains tax, but again whether this is true for your cryptocurrency assets depends upon your particular financial circumstances.
When you’re preparing for tax season, be sure to collect enough information to determine when your cryptocurrency holdings mature from short-term capital assets into long-term capital assets. However, once you have all of your data together in one place, consult with a cryptocurrency accountant. Together, you can figure out when the best time to sell your crypto holdings would be to minimize your tax liability.
The jury is still out on exactly how the IRS will treat cryptocurrency loans. Under the tax code, lending money is not a taxable event in itself. Only the interest paid on a loan is taxable as income for the lender. Theoretically, a loan in cryptocurrency should be treated the same as a loan for traditional cash. However, at least for the time being, this is a bit of a gray area. As a result, be careful when taking out or accepting loans in the form of cryptocurrency. Doing so may have unintended consequences come tax time.
The IRS provides tax breaks for generous individuals who give away their hard-earned cash. The same is true for cryptocurrencies. However, giving away your bitcoin to a charity is treated differently than giving it as a gift to your favorite niece or grandchild.
If you give away your cryptocurrency to a qualified charity, you are generally entitled to an income tax deduction for the full fair market value of the coin you donated. So, for example, if you bought a bitcoin when it cost $1,000 and then donated it to your favorite 501(c)(3) certified charity when the price of bitcoin was at $11,000, you can deduct $11,000 from your income tax returns. Even better, you’ll avoid paying capital gains tax on the $10,000 in profit you chose to forgo.
Charitable giving used to be one of the more straightforward aspects of tax law. However, tax return has made things much more complicated. Because the new tax policy raises the standard deduction to $12,000 for individuals ($24,000 for married couples) – almost double last years’ rate – there is less of a financial incentive to itemize your deductions. In other words, if your itemized deductions don’t add up to $12,000, you should just take the standard deduction rather than the individual deductions you may otherwise be entitled to. This can have a huge impact on charitable giving, which is one of the itemized deductions impacted by this new policy.
Get a Good Accountant
At the end of the day, you can’t go at it alone. This is particularly true if you’re a cryptocurrency investor. Reporting your virtual currency income under the capital gains rules is hard enough as it is. But now, the recent federal tax reform has changed the rules of the game.
A skilled cryptocurrency accountant can help you plan for the upcoming changes in the federal tax code, especially as they pertain to your virtual currency wallet. If you bought or sold cryptocurrencies in 2017 – or if you’ve thus far failed to report your cryptocurrency investments from prior rules – it’s a good idea to discuss your investments with a CPA that understands the ins-and-outs of cryptocurrency tax policies Thankfully, Happy Tax offers tax advice and planning services specifically focused on cryptocurrency investments. Be sure to start off 2018 right by planning your taxes with a cryptocurrency-trained accountant at Happy Tax today.