2017 Cryptocurrency Tax Cheat Sheet

2017 Tax Season
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With the New Year of 2018 now upon now, tax season is looming. One of the most common questions I get asked is do I have to pay taxes on my cryptocurrency gains to the IRS? The answer is simply yes. You don't want to position yourself to risk being audited by the IRS and potentially go through court hearings that may result in heftier fines, penalization, interest rates, and taxes.

Currently, there is a lot of confusion on how to go about free efiling for taxes and reporting earnings from cryptocurrency. Although I am not a tax professional on digital currencies, I can point you to the right direction (sources) on how to go about filing properly to avoid potentially the dreaded IRS audit. Although it may hurt to see your gains disappear to taxes, you will sleep much better at night.

2017 Cryptocurrency Tax Cheat Sheet

I highly recommend referring to this page that outlines scenarios in which you must report to the IRS about a taxable event. Because cryptocurrency is in its preliminary stages at the moment, it is crucial to document as much transaction information as you can by yourself or through the help of exchanges. Realize that exchanges are not obligated to be responsible for recording your trading activity. Currently, cryptocurrency in the eyes of the IRS is viewed as property. stevenmnorman from Reddit is a tax professional that hits the nail on the head on simplifying how to pay for cryptocurrency gains. Below are snippets of his post on Reddit.

  1. Short-term capital gains are considered to be short-term when the asset is held for less than one year. In this case, if you bought $100 of LTC in January 2017 and sold for $1,000 in December 2017, you would be taxed on the gain of $900 (sold $1,000 - $100 basis). Short-term capital gains are taxed at the same rate as your marginal tax bracket (10%, 15%, 25%, 28%, 33%, 35%, or 39.6% - see below).
  2. Long-term capital gains are considered to be long-term when the asset is held for more than one year. In this case, if you bought $100 of LTC in November 2016 and sold for $1,000 in December 2017, you would be taxed on the gain of $900 (sold $1,000 - $100 basis). Long-term capital gains are taxed according to 0%, 15%, or 20% according to which marginal tax bracket you fall in (see below).
  3. I highly advise you report any gains you incur, whether its $2 or $100,000. The IRS doesn’t have the records of crypto currency holders unlike real brokerages that must report to the IRS. If you do not report, you run the risk of the IRS receiving information from court cases with exchanges like Coinbase and you’ll pay both taxes, penalties, and interest as well.

Frequently Asked Questions

What if I trade my crypto for USD but leave the USD in my Coinbase wallet?

Trading your crypto for USD is taxable always. It does not matter if you leave the USD in an exchange or take out to your bank account.

What if I trade my crypto for another crypto? Is this taxable?

Trading crypto to crypto could be considered a like-kind exchange and therefore non-taxable, but the IRS has not released an official statement on it yet. The IRS discusses like-kind exchanges in FS-2008-18, February 2008 (see source). Five types of property are specifically excluded from Section 1031 treatment (like-kind) which does not include "virtual currency." The list of exclusions are inventory or stock in trade; stocks, bonds, or notes; other securities or debt; partnership interests; and certificates of trust. If you chose to not report crypto to crypto trades, you could run the risk that the IRS makes a statement on this matter and chooses to back-tax your trades. Please use caution when considering this! Consult a local and well-rounded CPA for assistance!

What if I trade crypto and incur a loss?

In this case, you are allowed to deduct up to $3,000 in losses (single or married filing jointly) per year. If your total net loss is greater than $3,000, you can carry it over to next year's return. Though you must first calculate the total net gain/loss before taking the $3,000 deduction from your AGI.

What if I buy LTC for $100, then sell it later for $500, have a gain of $400 but reinvest the gain into crypto? Will I be taxed on my $400 gain?

Yes. When you have a taxable gain, it does not matter if you immediately invest it back into crypto. A sale is a sale and will be taxable in the majority of the situations.

When do I pay my capital gains for crypto? Do I need to make a payment before I file my return? When do I need to file a tax return?

If you anticipate a sizable capital gain during the year, you must make an estimated tax payment in the quarter of the applicable gain if: 1) You expect to owe at least $1,000 in tax for the current year after subtracting withholdings, 2) You expect your withholding and refundable credits to be less than the smaller of: 90% of the tax on the current year return OR 100% of the tax shown on the prior year return.

You must file your return by April 15, 2018 for the 2017 tax year.

What forms do I use to report my gains on crypto?

All taxpayers are required to file Form 1040. If you have long-term or short-term gains, you will need to file Form 8949. The amounts from Form 8949 will then be totaled on Schedule D and Form 1040. There may be other filing requirements if you hold investments in foreign accounts.

What if trade my crypto into another fiat currency that is not USD, will I be taxed in the US?

Yes, you will be taxed. You must use a conversion rate to determine the amount of your gain in USD to report on your tax return. You also may be subject to filing additional forms, but this is not the case for the majority of people.

Source: stevenmnorman from Reddit.

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