Read This Before Filing Your Cryptocurrency Taxes 

Filing Your Cryptocurrency Taxes 

Believe it or not, we are already in the fourth quarter of 2019, and it’s been an incredible year for crypto assets. After a relatively stagnant 2018, cryptocurrencies, led by Bitcoin, have enjoyed a resurgence, competing alongside stocks, bonds, gold, and oil in a record-setting investment year. 

In all, the cryptocurrency market cap has added more than $125 billion, and crypto investors are demonstrating a renewed interest in crypto derivatives and other ancillary financial products. 

Of course, big gains can result in significant tax liabilities. As the end of the year approaches, now is the time for investors to begin preparing for tax season, something that always brings confusion and chaos to an investment group uniquely accustomed to order and process. 

Here’s what you need to know before filing your cryptocurrency taxes. 

#1 There is new guidance from the IRS. 

Practically since its inception, the IRS has struggled to adequately develop an appropriate tax structure for digital assets. Until now, all cryptocurrencies were viewed as capital assets that came with a blanket tax liability. 

This cut and dry approach to crypto taxes failed to account for the nuanced use cases and niche products that collectively comprise the crypto space. 

However, on October 9th, the IRS issued a fresh ruling on cryptocurrencies that more fully accounts for the industry’s idiocracies. 

For example, the IRS now makes tax distinctions between airdrops and hard forks, a change that will have a significant consequence for crypto accountants. At the same time, the IRS opens up a 23.8% preferential tax rate for long-term investors who hold their digital assets for more than a year. 

Most importantly, the IRS requires that investors keep comprehensive records of their tokens to ensure that their cryptocurrency taxes are appropriate, fair, and legal. 

#2 Crypto tax audits are on the rise. 

The muddied mess that posed as cryptocurrency tax policy created a curious environment for cryptocurrency investors. 

Simply put, the standards were so outrageous and, at times, confusing that many people chose not to report their digital assets on their taxes. 

It’s estimated that less than 7% of Americans who own Bitcoin or other digital currencies reported gains on their tax returns. 

Now, the IRS is cracking down on this behavior. In July, the agency sent letters to 10,000 crypto users requesting amended returns that account for the digital assets. 

While this only challenges a fraction of those who failed to report their cryptocurrencies, it sends a strong message to this year’s tax filers: file accurately or risk serious repercussions. 

#3 The ecosystem is expanding. 

Although Bitcoin remains the most popular cryptocurrency, today’s digital asset ecosystem is continually expanding. CoinMarketCap monitors nearly 2,500 crypto assets, and, when coupled with the burgeoning derivatives market, there are seemingly endless options to choose from. 

This is great for diversification and wealth management, but it can be tricky when tax time inevitably comes around. 

What’s more, today’s investors are often interacting with multiple exchanges, several different wallets, and various other platforms, which further complicates the reporting process. 

Before it’s time to file your taxes, take the opportunity to get your proverbial house in order. Review your record-keeping workflows, solicit help when necessary, and ensure that you are ready to file accurately and on-time. 

2019 was a big year for crypto investors, many of whom experienced prominent returns that were elusive last year. This is undoubtedly a good thing, but it renews a responsibility this tax season. 

The IRS is clearly more ready to handle this activity than before. Make sure that you take the steps necessary to meet their expectations and to take advantage of the new structures. 

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