Do you own cryptocurrency? Do you know every cryptocurrency investor is required to report their gains on their tax returns? The IRS views this as just another asset class and so crypto investments are subject to reporting and taxation. The IRS also won a lawsuit against Coinbase so now US based exchanges have to report customer data to the IRS.
A recent survey indicates that only 53% of Bitcoin investors plan to report their gains or losses to the IRS. Former federal tax prosecutor, Kevin F. Sweeney, issued a statement indicating that failing to report investment losses and gains results in big consequences including paying a penalty and interest.
Most crypto investors really embraced the global nature of trading in exchanges around the world, getting in and out of fast rising or falling coins, and moving assets wherever they needed to be to get in on the next opportunity. All this activity is going to be very tough to track as there is no reporting standard and no easy way to track and account for all these movements, buys, and sells.
As the IRS crackdown on unreported crypto continues, it is critical to understand cryptocurrency tax works and how to efficiently file this season. Bitcoin, Ethereum, Litecoin, and every other token are all subject to taxation if you had profits. But, if you had losses, you can reduce your income tax or capital gains in stocks or real estate.
Cryptocurrency Taxable Events
The IRS treats all virtual currencies as taxable investments, placing cryptocurrency in the same bracket as stocks and real estate. A taxable event occurs when a coin is sold for cash (fiat) or traded another cryptocurrency, or if a cryptocurrency is used to purchase goods or services. Similarly, converting one cryptocurrency to another (BTC to ETH to an ICO) results in a taxable event. However, transferring currency from one account you own to another (like your wallet to your exchange account) is not a taxable event.
You can save on taxes by knowing which coins to sell at a loss, which coins will be taxes as short or long term capital gains, and how to harvest your tax losses.
When filing cryptocurrency taxes, it is important to take into consideration all gains and losses, your holding period, your cost basis, and your transaction fees. If you have been an active trader you likely have thousands of transactions across dozens of exchanges and wallets. You are likely not capturing everything and overpaying on your taxes if you aren’t keeping organized and using good accounting software like ZenLedger to do the hard work for you.
Short and Long Term Capital Gain and Loss
Investors are familiar with the Form 8949, a tax filing form necessary to report short and long term capital gains on investments including cryptocurrency. Form 8949 takes information such as: date of cryptocurrency purchase, date of sale, proceeds, income and more.
Short-term capital gain occurs from the sale of crypto held for less than one year. If you have held tokens for more than a year before selling, it results in a long-term capital gain, which has a reduced tax rate of 0, 15, or 20 percent depending on your income. Once the asset is sold, the cryptocurrency falls in either a capital gain or capital loss bracket, similar to stock investments.
About 58% of Bitcoin investors are not aware that they can claim a tax deduction for their cryptocurrency investment losses. If you’ve lost value in your investments this year, there is a good chance you are eligible for up to $3,000 in federal income tax refunds. You can also put your crypto losses against any gains you had in stocks or real estate this year or going forward.
Keep Cryptocurrency Filing Simple
A leading tax software for cryptocurrency investors has just hit the market in collaboration with TurboTax. With thousands investors and accountants assisted and more than $500 million in assets processed, ZenLedger has created a fast and easy way for cryptocurrency investors to file their taxes and gain insights into their investments.
ZenLedger.io is a crypto accounting software that helps you stay on the right side of the IRS and optimize your tax payments. ZenLedger will take in your entire trade history and produce your tax forms for you while also providing you with an audit pack, a tax loss harvesting analysis, and the ability to make smart tax decisions.
The online software, enables users to import cryptocurrency transactions, calculate gains and income, and auto-fill tax forms like 8949, Schedule D, FinCen 114 FBAR, and FATCA. ZenLedger integrates with TurboTax for easy tax filing. Additionally, ZenLedger includes the following robust features:
- ZenLedger works with all major exchanges, wallets, and cryptocurrencies: Coinbase, Binance, Bittrex, Kucoin, Jaxx, Trezor, Ledger – as well as many smaller, niche exchanges and coins
- Profit/loss statements for individual investors and CPAs. Whether a miner, day trader, or Hodler, ZenLedger ensures you never overpay in taxes
- Portfolio analysis such as tax loss harvesting and management of short/long term capital gains and taxable events
- Imports transactions and prepares useful documents, including: Capital Gains Reports, Income Reports, Donation Reports, and Closing Reports
- Provides excellent and fast customer support for all tiers of service
Real IRS Crackdown
About 35% of Bitcoin investors falsely believe they are not required to report their Bitcoin investment gains or losses because did not gain or lose enough money to make it reportable. This is not the case as there is not minimum threshold for reporting. The IRS are actively targeting individuals using cryptocurrency for tax evasion or not paying their cryptocurrency gains. This is an exciting time to be investing in an entirely new technology and economy. But you need to invest wisely. With ZenLedger and TurboTax, you can rest assured that your cryptocurrency investments are reported accurately, simply, efficiently and in accordance with the IRS.
Link to IRS lawsuit
Link to IRS statement about taxation