The following is a guest post by Mario Costanz, CEO of Happy Tax and CryptoTaxPrep.com.
Tax season is upon us, and many cryptocurrency investors are working hard to get their records in order. The IRS requires you to report every time you traded one crypto coin for another, cashed out your coin into traditional currency, or purchased goods or services with cryptocurrency. For investors with heavy trading volume, this can be quite a chore. Even if you made just a few trades per week throughout last year, your reportable transactions can really add up.
If you traded cryptocurrencies this year, you might be looking at the most complicated tax return you’ve ever had to file. The average taxpayer doesn’t have nearly the same reporting requirements as cryptocurrency investors, so consulting with a tax professional this year is your best bet. My firm, CryptoTaxPrep.com can make sure your return is filed properly with our full-service bookkeeping, accounting, CPA tax prep and advisory service that includes access to one of the two reporting tools mentioned below.
Reporting Your Cryptocurrency Investments to the IRS
The IRS treats cryptocurrencies as capital assets subject to the capital gains tax. Like other capital assets, your tax rate depends on how long you HODL a particular coin before you sell it, as well as the price you bought in and the price you sold out. So, the IRS requires you to report what cryptocurrency you bought, the price you paid for it, the value of the virtual or traditional currency you exchanged it for, costs related to the exchange, your gains or losses, and the date that it occurred. This information is typically submitted to the IRS using Form 8949 and Schedule D of Form 1040.
Due to the nature of virtual currency, properly reporting your cryptocurrency transactions can be a bit trickier than other types of capital gains. Most capital assets – such as real estate, art, or securities – only create tax liability upon sale. However, when it comes to cryptocurrency, pretty much any way you use it is a taxable event. When you trade your cryptocurrency for cash or other virtual currencies, you must report your gains or losses to the IRS. This is also true if you use virtual currency to pay for goods and services.
Cryptocurrency reporting requirements are very broad; cryptocurrency investors are responsible for making sure their returns are compliant. The IRS doesn’t impose the same third-party reporting requirements for virtual currencies as other assets like stocks, bonds, and mutual funds; so don’t expect to receive a Form 1099 from your exchange. Instead, it’s every investor’s individual responsibility to properly report their cryptocurrency gains and losses to the IRS this year.
Tips for Good Recordkeeping
IRS virtual currency reporting requirements can be tricky, so consulting with a trained cryptocurrency CPA this tax season is a very wise choice. However, there are several online tools that can help you get prepared for that first meeting with your CPA.
Cointracking.info offers an online service and mobile app that allows you to track historical cryptocurrency prices as well as your personal profits and losses. The online service can import data from over 40 crypto exchanges so that it can track over 4,000 virtual currencies. Cointracking.info organizes all of your reportable trading information into one easy-to-use platform, and it can be a huge timesaver for cryptocurrency investors getting ready to file their tax returns. This is particularly true for high-volume traders active across several exchanges.
Most exchanges allow you to export your trade history. But then what do you do with it? Bitcoin.tax was created to use this data to help cryptocurrency investors figure out their capital gains or losses. Simply export your trade history from Coinbase, Gemini, Bitstamp, or any other compatible exchange and upload it to the Bitcoin.tax platform. From there, the online tool can help you estimate your capital gains and what you need to report on your Form 8949. Bitcoin.tax is a helpful recordkeeping and tax reporting tool for any crypto investor, so consider using it even if you had just a few trades last year.
To note, the data imports from the many exchanges to these tools often have issues and need to be manually reconciled. Also, when you are moving crypto from one of your own wallets or exchanges to another of your own wallets or exchanges, the reporting often counts it as a sale, and it has to be manually reconciled to have the data be accurate. Our team of bookkeepers, accountants, and CPAs handles those manual parts of these reconciliation processes for our clients.
Before you know it, Tax Day will be upon us. If you bought or sold cryptocurrencies last year, getting professional tax advice is a wise choice. A skilled cryptocurrency accountant can make sure you’ve properly reported your cryptocurrency investments, but that you are also making the most out of available tax credits and deductions. The cryptocurrency-trained Certified Public Accountants at CryptoTaxPrep.com have all the tax advice and planning services you need to file your returns properly this year.