Cryptocurrency taxes could actually pay off this tax season for investors who traded crypto in 2018.
But few of them are taking advantage of it.
According to a survey by Credit Karma, U.S. investors realized losses of $1.7 billion in 2018. More than a third – 35% – said they did not plan to report their crypto losses to the IRS.
Of those who said they weren’t reporting (which included some who had gains), 35% said they didn’t think they were required to report it. Another 57% said they didn’t think their gains or losses were large enough to require reporting. And 22% said they “didn’t know how.”
But the losses average out to $718 per crypto investor. And that’s definitely worth reporting. As painful as such losses can be, investors owe it to themselves to minimize them by claiming them as capital losses on their taxes.
We saw this phenomenon last year in reverse, as most crypto investors failed to report realized gains they had in the boom year of 2017. (Maybe that’s why some are reluctant to use their losses this year.)
And it’s not so much that they’re all trying to evade taxes; the unwillingness to claim losses from 2018 suggests most crypto investors simply don’t know what they’re supposed to do.
I lay much of the blame on the IRS for not bringing clarity to cryptocurrency taxes. The one statement the agency made in 2014 is inadequate and badly needs updating. I’ve made this point again and again, but all we’ve gotten from IRS is radio silence.
Today I’m going to explain in plain English the particulars of cryptocurrency taxes so you don’t miss out on any refund money the government owes you.
What You Need to Know About Cryptocurrency Taxes
What the IRS said in 2014 – all we have to go on – is that cryptocurrencies are considered “property.” Basically, that means gains and losses from the sale of crypto are, like the gains and losses from the sale of stocks, capital gains and losses.
You have two kinds of capital gains taxes: long term and short term. Long term is any investment sold after being held for at least one year. Short term is for investments held less than a year, likely to be common among crypto traders.
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Long-term capital gains have their own tax rates ranging from 0% to 20% (although it’s based on your taxable income).
Short-term capital gains are taxed as ordinary income. In other words, the gain is added to any other taxable income you have in that year.
Capital losses can be used to offset capital gains. A simple example: Let’s say you sold some Apple stock for a gain of $10,000 in 2018 and sold some Bitcoin at a loss of $7,000. The IRS allows you to deduct the loss from the gain, so you only need to pay tax on $3,000 instead of $10,000.
But what if you had no gains?
You can deduct up to $3,000 of losses against your income in any given tax year. While not a huge sum, it will increase your refund (or reduce what you owe). If you have a loss larger than that, you can carry it forward to offset gains in future tax years. Or you can keep using the $3,000 deduction each year until the full amount of the loss is exhausted.
So if you had a $10,000 capital loss on your crypto trading in 2018, it would take four tax years to fully deduct the loss – assuming you had no capital gains in any of those years.
None of that is unique to crypto taxes.
But one tricky difference where crypto is concerned is that investors need to track their basis cost – what they paid to buy the crypto – themselves. You need to know the cost basis as well as the price for which you sold the asset to calculate your gain or loss.
Retail stock brokers do all that for you and send you a 1099-B form in the mail, but crypto exchanges do not. (The lack of a document in the mail may partly explain why so many crypto investors don’t think they need to report their trading to the IRS.)
At best, you’ll be able to download a record of all your transactions so you can calculate the cost basis yourself. Using a service like CryptoTaxPrep.com, Cointracking.info or Bitcoin.tax helps, but it’s still an extra step that costs extra money.
Now, if that’s all there was to it, figuring cryptocurrency taxes would only be a bit more inconvenient than dealing with other capital gains taxes.
But crypto has issues stocks don’t have…
Why We Need More Clarity on Crypto Taxes
If you bought and sold your crypto with U.S. dollars, it’s pretty easy to calculate your cost basis.
But the majority of cryptocurrencies don’t trade against the dollar. They’re bought and sold with other cryptocurrencies, primarily Bitcoin and Ethereum. So to figure out what you paid, you need to find out the U.S. dollar value at the moment of trade of the other crypto you used in the transaction.
Some crypto investors believe that such “crypto to crypto” transactions, because they do not involve the U.S. dollar, are not taxable events. But the IRS says otherwise.
In fact, according to the 2014 IRS guidance, any transaction made with a cryptocurrency is a taxable event.
That includes crypto obtained through mining, as well as crypto obtained from “hard forks,” such as the Bitcoin Cash fork from Bitcoin in 2017.
And most importantly, it includes using crypto to buy something – even something as small as a beer or a cup of coffee.
For any crypto enthusiast who makes frequent transactions, be it with merchants or other crypto fans, this means calculating capital gains and losses on every transaction. It’s no wonder few people even try to comply with this.
That’s why many have called for crypto to be given what’s known as a de minimis exception. That means transactions below a certain amount, such as $600, would be exempt from taxes.
In fact, over the past few years, several bills have been introduced in Congress to create a de minimis exception for crypto.
A bill introduced in the U.S. House of Representatives at the end of last year, the “Token Taxonomy Act,” includes the exception. (The bill also makes an effort to distinguish which cryptocurrencies fall under the definition of “securities” and which qualify as “digital tokens” exempt from SEC regulations – a key point for ICOs.)
While the Token Taxonomy Act died with the end of the last session of Congress (all pending bills die when a session ends), the bill’s sponsors – Rep. Warren Davidson (R-OH) and Rep. Darren Soto (D-FL) – have suggested they will reintroduce it to the current session, perhaps as soon as this week.
But remember, this is Washington. It will be a long time before this bill is even brought to the floor for a vote.
Still, it’s progress. Stay hopeful, crypto fans.
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