It’s here! The United States tax season officially started on Jan. 27, and this time, crypto tax is in the spotlight.
Following developments that culminated in theInternal Revenue Service publishing new guidance in October 2019, the bureau has begun to invest efforts in cryptocurrency tax reporting and investigation and is expecting to see an increase in crypto tax reports.
Those who intend to report their crypto activity can skip down to the tips for easy and accurate reports. As for the crypto cypherpunks who are not going to report — these next few lines are for you. Take a moment to realize that times have changed.
The most crucial advice this tax season is to realize that the anti-tax anarchist concept of “tax me if you can” is not going to work anymore. This is not 2011, when nobody knew where this was all going, and there were so few people involved with Bitcoin that the government didn’t care to deal with you.
The cryptocurrency ecosystem is growing — as it should be — and to get into the mainstream, it needs to go through regulation, and that includes paying taxes.
Sure, you can choose to hide and work with all the privacy solutions available to crypto, but understand that if you decide to stay unreported, the option for crypto trading in regulated exchanges along with more crypto services will not be available to you.
The IRS is definitely focusing on cryptocurrency this tax season, as it announced an International Compliance Campaign for cryptocurrency:
“The Virtual Currency Compliance campaign will address noncompliance related to the use of virtual currency through multiple treatment streams, including outreach and examinations. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practicable.”
Furthermore, the IRS Criminal Investigation, or IRS-CI, division is also focusing on cryptocurrency transactions. In their lastcriminal investigation report, Jim Lee, deputy chief at the division, wrote:
“IRS-CI almost always has jurisdiction. There is no better example of this than in tracing cryptocurrency transactions. Cryptocurrencies are undermining the financial and tax system. Companies pay employees in cryptocurrency or receive crypto for goods/services. They do not pay taxes and entities shift income to offshore exchanges with no reporting requirements, utilizing exchanges with little to no AML practices. Understanding the advancements in this area and staying.”
And if this is not enough, in the last Internal Revenue Service Progress Update Fiscal Year 2019, the IRS set up goals for 2020:
“The last in 2019, the IRS sent educational letters to more than 10,000 taxpayers who may have failed to properly report virtual currency transactions. The letters explained the tax obligations associated with virtual currency and describe how taxpayers can correct past filing and reporting errors. Virtual currency will remain an important focal point for the IRS in 2020. Our enforcement efforts are continually evolving to support the extensive efforts of compliant taxpayers.”
If you are considering reporting, here is what you need to do to get your crypto taxes done and ready with minimal headaches:
1. Before you get to calculation and filing — collect all your data
After accepting the fact that it is time to report your crypto activity, go to the first step of a fully accurate and complete report: data collection. The more thorough you are, the easier the next stages will be:
- Get a full CSV from all the crypto exchanges you use for trading and investing
- Make a list of all your crypto addresses from all wallets
- If you received an income in crypto — collect all relevant records
- If you received crypto as a gift, donated crypto, etc., collect those records as well
- If you engaged with crypto mining, collect all the relevant data available
- Collect all records from airdrops and forks you have received
2. Choose the right calculation method for you
Did you get into crypto early and trade over the years when prices went up? If so, specific identification is the method for you.
Did you buy your first crypto in late 2017 and only sold a few times since then, when the price was at its lowest? You can consider using the first in, first out method.
Make sure you understand each method and its implications for you.
You can save a lot of money by choosing the right method.
The new IRS guidance provides instructions on how to perform specific identification and determined that if you cannot specifically identify your crypto, you should use the FIFO method.
While the specific identification method identifies the exact Bitcoin (BTC) a user has sold, and calculates the user’s tax liability on the sale of the actual Bitcoin based on the blockchain evidence, the FIFO method does not take real-time user activity into consideration, which could result in overtaxation due to the calculation process of all purchases and all sales.
In order to calculate using the specific identification method, you have to identify — using evidence from the blockchain — the purchase dates and sales dates of all Bitcoin that came in and out of your wallet for the same tax year. Then, you must match the purchase and sale dates and prices of the same Bitcoin using blockchain data, and finally calculate the tax liability.
3. Use the right crypto tax calculation platform
Choose a platform that will make sure you have a full report, alerts you of missing information, helps you understand what is the right calculation method for you, and meets all IRS requirements.
4. Understand which tax form is applicable for you
If you have capital gains, use Form 8949, Sales and Other Dispositions of Capital Assets, and then summarize capital gains and deductible capital losses on Form 1040, Schedule D, Capital Gains and Losses.
If you need to report an ordinary income from crypto, use Form 1040, U.S. Individual Tax Return, Form 1040-SS, Form 1040-NR, or Form 1040, Schedule 1, Additional Income and Adjustments to Income, as applicable.
5. Better safe than sorry
If you are not sure you got it right, consult a tax professional.
6. Be aware of deadlines
It is a common mistake to forget the filing deadline and end up paying penalties. Individuals who do not get an extension from the IRS must report by April 15.
Or Lokay Cohen is a vice president at Bittax, a crypto tax calculation platform. Or has 10 years’ experience with regulation, managing a leading tax consultant firm. She holds a LL.M. law degree, a B.A. in communications and an M.A. in management and public policy. In her work at Bittax, Or promotes the goal of bridging between cryptocurrency to the taxation reality to enable tax reporting under a clear regulatory framework and specific identification methods.