FAQs about cryptocurrency related taxes. Many people have made a significant amount of money by investing in cryptocurrencies. The problem is that most of the governments are not sure how to tax cryptocurrencies. You need to understand that even though, the rules might not be clear but the government would indeed want to take some taxes on the profits which you earn.
Today we would share with you some of the questions pertaining to cryptocurrency taxes.
Do I have to declare the money made in the calendar year 2017 by selling cryptocurrencies?
The answer to that question is a yes. Coin base recently stated that only 802 of its customers actually declared income which they made from Bitcoins in 2015. Even though IRS has not taken any action against the people who are making money from Bitcoins, but by not declaring it but you can be sure that the government would be taking at least some kind of action soon enough.
What are the crypto taxes which you have to pay?
IRS is considering cryptocurrency profits just like equity profits or profits from physical assets. Therefore, you are entitled to pay long-term capital tax which is around 20% if you sold the cryptocurrencies which you owned after 1 year. If you sold before one year, then the normal income tax rate would be applicable.
What should you do in case you took a loss in cryptocurrencies?
You can use the losses in order to offset the capital gains or in order to offset the income tax up to $ 3000. You can also carry forward the losses in the next financial year as well. However, for that, you have to 1st declare your cryptocurrency holdings and thereafter only you would be able to do so.
What should you do if you just use cryptocurrencies in order to transact?
Even if you have used to cryptocurrency exchanges to just to transact normally, it is still taxable. If you bought the cryptocurrencies at a lower rate and then used it to transact when the rate was higher, that constitutes profit. In such a case, you need to pay the taxes.
What should you do if you exchange cryptocurrencies?
Even exchange of cryptocurrency would make you liable to pay taxes if you earned some profit on it.
As you can see, if you really want to ensure that the taxman doesn’t come knocking on your door, it is important to pay your cryptocurrency taxes. Once you are able to do that, it would be easier for you to sleep well and ensure that you do not owe any taxes. / Source: Fortune
How to file your income taxes on bitcoin in 2018
The Verge has compiled a lot of information about the crypto taxation. It’s been a turbulent year for bitcoin, and now it’s time to talk about taxes. Most people who held on to bitcoin over the past year made money off of it, and as Americans prepare for income tax season, the IRS wants its cut of the profits. Amid unprecedented gains — and unprecedented enforcement efforts — this looks to be the year that tax collectors get serious about bitcoin earnings, which means it’s a very good time to make sure you’re doing everything right.
So let’s get into what you’re reporting and how to report it. To simplify things, we’re only talking about bitcoin here, but note that these general guidelines apply to other cryptocurrencies as well. Also, none of this is legal advice, so if you have specific questions, it’s best to consult with a tax lawyer or accountant.
We’re talking about income tax, so your goal is to figure out your income from bitcoin in 2017. For the purposes of the IRS, that means bitcoin assets that were converted into non-bitcoin assets like cash or goods and services. Your bitcoin holdings aren’t taxable (at least not yet), but any time you sold bitcoin or used it to buy something, you were accruing taxable income.
You’ve already got records of most of those transactions, either on the blockchain or from your wallet provider, but converting it to dollars can be a real hassle since you’ll need to run the bitcoin value against the price of bitcoin at the time of the transaction. (You can look up the historical price of bitcoin here.)
DO YOUR BEST TO DOCUMENT EVERYTHING
First, you’ll want to download all transaction data from the exchanges you use, usually available as CSV files, suggests Vincenzo Villamena, managing partner at Online Taxman, an accounting firm that specializes in cryptocurrency. Some exchanges, like Coinbase, will send certain US users form 1099-K if they have received “at least $20,000 cash for sales of cryptocurrency related to at least 200 transactions in a calendar year.” If you don’t use an exchange, just do your best to document everything.
There is also software that can help with doing bitcoin taxes, such as Bitcoin.Tax and CoinTracking.Info. Bitcoin.Tax lets you upload CSV files from exchanges, and it’s free for up to 100 transactions. CoinTracking.Info does the same, and it’s free for up to 200 transactions. (As pointed out by Forbes, which reviewed both software, the programs let you cherry-pick which accounting method you’d report by after the year has ended. Some of the methods may not be IRS compliant.)
WHERE TO REPORT BITCOIN INCOME
Most people will have income from buying bitcoin and then selling it at a higher price. If that’s true for you, then any income from the sales needs to be reported on Schedule D, an attachment to Form 1040.
How you report the sales will depend on how long ago you bought your bitcoin. If you’ve held the bitcoin less than a year before transacting with it, it’s taxed as a short-term capital gain, which is still taxed at the same rate as ordinary income. But if you’ve held bitcoin longer than a year before using it, bitcoin is taxed as a long-term capital gain at lower rates of anywhere from 0 to 20 percent, also depending on what income bracket you fall under. If you’re in the top three highest income brackets, you also have to pay a 3.8 percent tax on net investment income. (It’s also worth noting that while not being taxed as ordinary income, capital gains may increase your overall adjusted gross income, which could impact which tax bracket you ultimately fall under.)
In every case, the tax rate on your bitcoin sales depends on your method of acquiring bitcoin and the length of time you’ve held it. Here’s a chart, because it’s complicated. Just know you’ll be making heavy use of the first few pages of your tax return as well as Schedule D.
HOW BITCOIN IS TAXED?
|Method obtained||Duration held||How to report||Additional taxes|
|Received for services||N/A||Ordinary income||State income tax|
|Bought for investment||Less than a year||Ordinary income||State income tax|
|Bought for investment||More than a year||Capital gain||3.8 percent for top three tax brackets|
|Mined||N/A||Ordinary income||Self-employment tax if applicable|
|Bitcoin fork||N/A||Ordinary income||TBA|
Things get more interesting if you were mining your own bitcoin. Any bitcoin gained through mining is taxed as ordinary income, based on the “fair market value” of the bitcoin at the date it was received. (Again, you can look up the historical price of bitcoin here.) Additionally, if the mining counts as a trade or business transaction, and the taxpayer isn’t doing it for an employer but for themselves, they have to pay the self-employment tax, which is 15.3 percent on the first $127,200 of net income and 2.9 percent on any income in excess of $128,400.
If you were paid for goods or services in bitcoin, it gets taxed as ordinary income. (It technically is income, just in a different currency.) Depending on your income bracket for 2017, the federal tax rate can be anywhere from 10 percent to 39.6 percent. The bitcoin will also be subject to state income tax.
If your bitcoin account is held abroad where the private keys are owned directly by the exchange, you get double the fun: the value of the account has to be reported to the US Treasury using FinCen form 114, and to the IRS with the form 8938. US residents and citizens who own less than $10,000 of assets abroad don’t have to report.
If you have any other questions, you can look to the guidance on virtual currencies released by the IRS in 2014. It’s a few years old, but it’s still the IRS’s best guidance on the issue, and the agency referred questions back to the 2014 document when asked for comment.
WHAT ABOUT THE BITCOIN FORK?
On August 1st last year, bitcoin was forked into two digital currencies: bitcoin and bitcoin cash. The new bitcoin cash is also taxable income, although the IRS has not yet addressed this event and provided guidance for cryptocurrency forks.
“The problem is, we have the tax code, we have all the regulations, we have this 2014 notice which now seems like it’s 100 years old and so we don’t have any guidance,” says Connecticut-based tax lawyer Suzanne Walsh. “The IRS is going to come out and say, here’s what this is and right now we’re only guessing.”
OTHER NEW CHANGES
The Republican tax reform bill that passed in December not only shifted around tax income brackets, but it also cut out a bitcoin investor loophole. This will only take effect when filing 2018 taxes in 2019. The bill eliminated an exemption where bitcoin investors switching over to Ethereum, litecoin, or other altcoins could defer paying taxes on the original bitcoin. This was known as a “like kind exchange,” also known as a 1031 exchange. In 2018 tax returns, that exemption will only apply to “real property,” meaning real estate.
WHY YOU REALLY SHOULDN’T SKIP OUT ON BITCOIN TAXES
The IRS has gone after bitcoin tax evaders before. In 2016, the IRS requested the Coinbase records of all the people who bought bitcoin from 2013 to 2015. After examining tax returns from those years, the IRS found that only 800 some people reported their bitcoin gains on the form 8949 each year. (Form 8949 is a summary of bitcoin gains that basically supplements form 1099, which cryptocurrency taxpayers don’t get from exchanges.)
The IRS partnered in 2015 with a company called Chainanalysis to identify owners of digital wallets who haven’t been paying their bitcoin taxes, according to a contract discovered by The Daily Beast last year. Still, Chainanalysis only has information on 25 percent of all bitcoin addresses, its co-founder Jonathan Lewis wrote to the IRS, meaning that the other 75 percent remain anonymous. It’s likely that the IRS will continue to have to lean on outside consultants like Chainanalysis, says Walsh.
If the IRS catches on that you didn’t pay the tax, you’ll be dealt with like any other tax evader. You’ll be sent a deficiency notice which you can either pay or contest. And the IRS could always later catch you in a regular audit, says Walsh. Common fees include a “substantial understatement” penalty and “negligence or disregard of the rules” penalty, which are an additional 20 percent of the net understatement of tax. If the IRS thinks you knew about the bitcoin tax rates and laws and faked your tax return anyway, it will charge you an additional 75 percent of the underpayment for fraud.
It’s also likely that your accountant won’t sign off on a tax return where you underreported capital gains, due to ethical concerns. “Willingly knowing that somebody had capital gains that were reportable is like a pretty bad offense. It’s obviously directly fraudulent,” says Villamena. “It’s a lot worse than if someone just added an extra meal expense that was obviously social and business together.”
WAYS TO MINIMIZE BITCOIN TAXES
You can donate cryptocurrency to charities but you must donate directly to the charity, as selling it first would be taxable. While charities like Goodwill may not accept bitcoin, you can still donate to causes like The Water Project, Wikileaks, and the Internet Archive to name a few. Robert Wood, a tax lawyer who’s written on cryptocurrency taxes for Coin Telegraph, says, donating bitcoin to charity “can be a smart move, generating a tax deduction for the market value, without having to pay tax on the appreciation.”
You can also hold on to the bitcoin long-term, disregarding the downturn in bitcoin prices recently and any desire to cash out early, in order to defer taxation, Villamena suggests.
He also added that since his firm has an international focus and many of his clients have foreign spouses, he sometimes recommends them to hold their cryptocurrency under their spouses’ names. Other countries have lower tax rates than the US. Germany, for instance, treats cryptocurrency as a currency, while Denmark doesn’t tax capital gains.
This is all we know about US tax laws on bitcoin so far. It’s enough to answer most questions, but as cryptocurrencies keep evolving, and new situations like bitcoin forks arise, we’ll soon need more guidance from the IRS.
The Australian Taxation Office
The taxman is after your bitcoin profits — though the law is a grey area
According to a report by abc.net.au, Regulators are playing catch-up when it comes to the brave new evolving world of cryptocurrencies.
The Australian Taxation Office believes bitcoin, ripple, ethereum and hundreds of other digital currencies are “a form of property”.
“Any financial gains made from the selling of bitcoin will generally be subject to capital gains tax (CGT) and must be reported to the ATO,” a spokesperson from the tax office said.
But this remains a grey area that is yet to be tested in a court of law.
Until that happens, the ATO has advised cryptocurrency owners to keep good records of their intentions, transactions, and who received payments.
It might be wise to heed that advice, given the tax office has warned it will be looking out for tell-tale signs of crypto tax dodgers living beyond their means.
“The ATO is here to help those that are genuinely trying to meet their tax obligations,” the spokesperson said.
“However, where people attempt to deliberately avoid these obligations, we will take strong action.”
This includes using “a range of existing powers” which are used to address “unexplained wealth and conspicuous consumption that may arise through profits derived from cryptocurrency investment”.
Beware crypto taxes
One of Australia’s leading tax experts has warned that many investors mistakenly think their cryptocurrency profits are tax-free.
“It seems that individuals have potentially not looked into the situation and may not be aware about potential tax consequences,” Macquarie University professor Martina Linnenluecke said.
“The courts may see cryptocurrency investors as speculators unless they can prove otherwise.”
This means the gains they make from investing in cryptocurrencies may be taxed fully as income — rather than capital gains — so they will miss out on the tax discount after holding the currencies for more than a year.
Some tax experts believe at least 90 per cent of people who claim to be “cryptocurrency investors” are really speculators, even if they have held the asset for more than 12 months.
“It’s different to shares — with shares you hold for the long term but during the course of that holding you will receive, often not always, but most often you will receive a dividend,” said Professor Bob Deutsch, the Tax Institute’s senior tax counsel.
“It’s a little more difficult to see that in the context of a cryptocurrency …[which are] generally held for speculative purposes.”
The crypto revolution
Once the preserve of criminals, cryptocurrencies have become the vehicle of choice for speculators and dissidents.
Their rise in popularity has largely been due to people’s “fear of missing out” (when one sees their friends and neighbours investing and making huge gains).
Another reason is their mistrust and hostility towards the traditional banking system.
“If you have a job at a company they will pay your salary into the bank and the bank charges you a fee so you can take your own money that you’ve earned out,” cryptocurrency holder Adriana Belotti said.
“And if you leave your money there they will lend that money four times over to everybody that’s getting mortgages and make a mint on it but you only make, I don’t know, 1 per cent a year?
“So they just don’t play a fair game.”
Ms Belotti’s views are best understood when one considers the economic instability from her upbringing.
“I grew up in Brazil … a country where economical instability is the norm,” she said.
“So having the option of using a currency that is not affected by the government is a good thing.”
Too much of a good thing it seems for governments to remain on the sidelines.
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