Learn about how to report cryptocurrencies and prepare your crypto tax return in this transcribed Crypto Tax Webinar. Presented by Clinton Donnelly and sponsored by Accointing.
In the full live webinar, we covered:
- How to deal with COVID 19: Paying Crypto Taxes On An Installment Plan
- The current on-going policies regarding crypto-taxation
- What are taxable events and how to handle them
- The sent IRS letters and the different implications for each of them
- The next steps in order to conduct your crypto tax submission
- Some opinions from a top Crypto CPA in the market and average estimate of how much you will be paying in taxes
- An idea on how to estimate your taxes with a crypto tax tool
In Part One, IRS History With Crypto, we discussed the tax guidance the IRS has created to report cryptocurrencies and breakdown what those IRS activities have been in the history with crypto.
We also looked at what type of enforcement the IRS is doing and reviewed how they’re slowly increasing the implementation level in how they’re going after people. We also explored some IRS letters that they sent out.
PART TWO: How to Report Cryptocurrencies
In Part Two, we are going to discuss how to report cryptocurrencies on your crypto tax return. We’ll look at the mechanics and tax aspects of that.
When to report cryptocurrencies as a taxable event?
Cryptocurrencies are treated as property.
You only make income from property when you sell it. So buying cryptocurrencies is not a taxable event.
A taxable event is something that has to be reported on your income tax return.
You can buy cryptos all day long, and you don’t have to report them.
However, when you sell one, you have made a profit because you will hopefully sell it for a gain. That gain is what you have to report on your tax return.
I want to address a critical point that many people don’t understand who are new to taxes, called capital gains.
When you trade one crypto for another crypto or have a crypto-to-crypto trade, is that a taxable event?
It’s taxable for the crypto that you gave up because you have already achieved some gain or loss for that crypto.
You have to report that even though you didn’t take or receive US dollars from the transaction.
From a tax law point of view, you’ve made a gain when It moves from this coin to that coin.
Every transaction has to be reported on Form 8949. And that’s what services like Accointing do exceptionally well.
You plug in all your transaction records from your exchanges and wallets.
Accointing’s tool will go through and match it up and generate the forms you need to do a tax return. It can create the reports and forms that you need to give to an accountant to prepare or to do it yourself with TurboTax or Tax Act.
So if you decide to pay somebody, $2,000 in Bitcoin, because they’re going to do some service for you, is that a taxable event?
When you sell Bitcoin, You give up ownership of it. The value of that Bitcoin is going to be $2000 because that’s what you agreed to in this scenario. That is equivalent to a sale event or an exchange, and giving up that Bitcoin would be a taxable event.
The person who received that Bitcoin sale, got income. So on their tax return, they have to report that they received income.
Suppose you’re someone who got paid in crypto for doing work or selling a product that is income. These are reported like a wage or on your business income statement.
I want to hit that home: Every trade crypto-to-crypto is a taxable event. This concept is essential. Many new traders don’t realize that a gain can be a positive gain or a negative gain.
We call negative gains losses, but they’re all important.
Even though you had some gains, if you have other ones that are losses, you can use those losses to offset your gains, and you only pay tax on the net. Gain the winners, minus the losers.
You pay a tax on the collective gain, if it’s a positive number.
I’ve had so many people who bought Alt coins in 2017, and the prices went down, down, down, and became worthless.
I’ve had to tell clients that all those worthless coins they bought are hidden gems.
You can claim those as tax losses, and because they are worthless you can offset the gains that you’ve made, and you’d save a bundle of money on your taxes.
I want to stress the importance of both of those.
When you buy crypto with Fiat, the first time is not a taxable event, but when you get the crypto back and get a fee outback from selling crypto, that is a taxable event.
How To Compute Your Crypto Taxes In The US To Report Cryptocurrencies
We use the word basis, or you might’ve heard of a cost-basis; both words mean the same thing.
The basis is the cost. It’s the collective cost that you’ve had in owning something before you sell it. The price you bought it for, that’s your cost basis. And when you sell it, that’s your list of use and equivalent to the word proceeds.
The proceeds of a sale are whether you sold it for cash or whether you sold it in any swap for some other coins.
You subtract those proceeds and you get the gain even if it’s a negative amount. Proceeds are always expressed in US dollars.
Taking Advantage Of Long-Term Capital Gains To Save Money
I’m going to tell you about one of the most significant ways to save money on your crypto taxes: by taking advantage of long-term capital gains.
When you sell a coin in a unit treated as regular income, the gain is taxed like a regular income (like a dollar of salary), and you pay taxes on it.
But if you have held that coin for more than a year, you get a lower tax rate; it’s called the long-term capital gains rate.
For most people, that’s 15% versus your regular tax rate, your tax bracket. The marginal tax bracket of most people is in the 20% to 30% range. So, long term capital gains is a great way to reduce your taxes.
Another thing is the transaction fees, especially if you’re a high-frequency trader, your transaction fees are quite significant compared to your total gains. So, you can claim those transaction fees. They’re part of the cost basis for your trades. You need to use a tool that captures the transaction costs as well as the trade values. I will mention Accointing for this, but most of them will do this for you.
Next, we’ll talk about the holding period. It lays out the principle of a long-term versus the short-term capital gains. The IRS fully approves this. Congress likes long-term capital gains and is encouraging people to do it. It’s part of Congress’s strategy for creating investment in the United States.
How are tokens considered for tax purposes?
Tokens, ERC-20 tokens, or ERC-721 tokens, are ultimately still treated as property. There is a US dollar term for the purchase price, and then there’s a sale price. You’re going to subtract those to calculate what the gain might be or the loss. So it doesn’t matter what the token was doing.
A lot of these tokens may be stable value coins. They’re worth a dollar, but a lot of stable value coins fluctuate up and down a bit.
You can calculate the gain and loss of those, but should expect that to be pretty close to zero in most situations.
Still, all tokens in all cryptocurrencies are treated as property and taxed as property.
Now we’ve identified two different ways that can happen.
We have capital gains, which comes from investments, and then you have income.
For example, if my employer paid me, or if I did some work for somebody out of a contract basis, that coin that came in is income. A hundred percent of it is income.
Now, I hold on to that coin and I hold it for a year, and then I sell – now that’s an investment. The cost basis of that coin is how much I declared as income when I received it.
That’s how you determine the cost basis.
What about some other characteristics?
What if you have done mining, how do you treat that income to report cryptocurrencies?
Mining income is business income because it also has an expense.
You have the cost of equipment, which can be depreciated and usually written off in the same year, the cost of electricity, and the other utilities involved.
You do have costs with mining, which can offset the income, and you don’t have to pay as much as a staking income.
Not having the expense side; you just have staking income. If you had income like interest from lending your coins to someone, these would be treated as interest.
If someone gave you some cryptocurrencies, that would be a gift. Gifts are not taxed as income. People can give you all the coins in the world as gifts, but it’s not taxable to you. It is an exchange and is a taxable event to them.
However, if it’s a charitable gift, they would report it as a charity.
If it were a gift to a friend, the value of that coin on the date it was given is considered the sale price, and there’s a taxable aspect.
Airdrops are a controversial point, because the IRS came out with an FAQ, here in October of last year, which angered a lot of people.
The IRS said airdrops are treated as income on the day that they’re received. But as many people found out, the coins that you received by airdrops were sometimes not solicited, and it was dubious whether they were worth anything at the time that they were received or not.
We talk about the fair market value of coins and fair market value is what an informed buyer and an informed seller would agree to for the price.
When the airdrops that people have come out, there’s no market for some of these coins. So, the IRS had backpedaled on that. The advice they gave, you can treat two different ways.
One, is to treat an airdrop as income on the time it’s received, or you could classify it as $0, as a gift to you at $0. Then you won’t pay taxes on it when you sell it sometime in the future, that would be two different tax treatments that are out there.
The difference has to do with the convenience of tax reporting.
Although the first approach I told you about, treating it as income, would be the more appropriate way to manage them.
When you transfer coins from your wallet to an exchange or back and forth, the act of moving is not a taxable event. There’s no gain. It’s still your coin after you transfer it. Although you might have been putting it into the custody of an exchange for that time, it’s still your coin.
Those are some broader characteristics.
Report Cryptocurrencies With Reliable Resources
If you have a more complex situation, you can talk to the people at Accointing on their chat web page.
You can also contact me on my website DonnellyTaxLaw.com and schedule a consultation for a fee; we can go over whatever your particular situation is.
You can also visit our website for do-it-yourself resources for doing your taxes.
Stay Tuned For Part Three Of The Crypto Tax Webinar
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