All US Bitcoin Investors Need to Know This About Taxes
The IRS has spoken.
The cryptocurrency tax law is clear.
In this post, I’m going to share what you need to know about taxes and cryptocurrency. We’ll start with the basics and end with an advanced tactic to save you money.
The first thing you’re probably wondering is “do I need to file taxes?”
Buying cryptocurrency does not require you to file taxes.
But SELLING does.
As does DONATING, SPENDING, MINING, or GETTING PAID.
See, in the IRS’s eyes cryptocurrency isn’t currency.
And it certainly isn’t cash.
Tax nerds call it a “capital asset.”
Think of it like a share of Apple Stock.
If you sell that share of stock at a gain, you owe taxes on the GAIN.
Similarly, if you buy $100 of Bitcoin, and sell it for $150, you’re taxed on the $50 you made.
In the IRS’s eyes SPENDING bitcoin, is the same as selling. Even if you’re just buying a cup of coffee.
And that time you donated some bitcoins after reading a great blog post? Also taxable.
Literally every time you spend cryptocurrency, you need to report it on your taxes.
You'll pay a certain percentage of tax based on your income.
But there’s another factor affecting your tax rate: how long you owned the cryptocurrency before you sold it.
The government will give you a tax break if you sell after holding for more than a year.
This is called a "long term capital gain."
So If your want to buy and spend Bitcoin over short time periods, that’s fine.
Just understand that there are tax consequences.
Now, if you pay taxes on the gains, do you get to deduct the losses?
You can even write off those annoying Coinbase fees once you sell.
Losses and fees reduce your gains. Which reduces your taxbill. You can net all your trading losses against your gains.
In fact, if you are down for the year, you can use the net loss to offset other sources of income. Like other investments. Or your job.
You can write off up to $3,000 of losses each year. And these losses carry forward FOREVER (just not backwards). So if you lost $30,000 trading Bitcoin in 2017, that’s 10 years of tax deductions.
You want to pay the legal minimum in taxes, right?
There's one key tactic called “tax loss harvesting.”
Tax loss harvesting is any way of showing a loss on the books, without taking a real loss.
For example, if you own some Bitcoin, and the price plummets, you can sell, wait a week, and rebuy.
Now you have the same amount of Bitcoin, but you also have a tax deduction on the books.
The only thing you need to consider is the “economic substance doctrine.” This means that your transaction must have a purpose other than reducing your tax bill.
Basically, you can’t sell, lock in a loss, and immediately rebuy.
But you can sell Bitcoin at a loss, take the tax deduction, and buy Ethereum.
Or you could sell Ethereum at a loss, wait a week, and rebuy.
You just need some kind of change.
A savvy cryptocurrency investor will recognize opportunities to harvest losses.
Just remember that if you sell and rebuy, you reset your holding period.
And the IRS gives you a tax break for holding cryptocurrency for over a year.
So there are several factors at play.
Now this all may sound complicated.
And it can be.
So let's get super practical about the steps you need to do in order to do your tax return.
In 2018, you'll need to gather a record of every cryptocurrency transaction you had for 2017.
This way, you can figure out your cost (aka basis) and proceeds from every transactions.
Most cryptocurrency wallets or exchanges will have a report you can download.
Coinbase issues a "cost basis for taxes" report or a "1099-K." Other wallets and exchanges should have something similar.
Next, you'll need to fill out form IRS form 8949. This is where you calculate your gains and losses.
This calculation can get tricky, so I recommend using software. I'm not affiliated, but Libratax and Bitcoin.tax are the market leaders.
Your 8949 will flow into Schedule D on your tax return, which will feed up into your general return.
It's possible to do this with traditional tax software, but they weren't built with cryptocurrency in mind, so it's easy to make a mistake.
At this point you're done! Make sure to file by April 15th.
Standard disclaimer: the above constitutes general information, not specific advice. For an individual case, please consult a tax advisor - like me :)
If you have any comments or questions about Bitcoin and taxes, shoot me a message below. Or just introduce yourself. I love meeting like minded people.