Top 5 things to know about Taxes and Crytpocurrency
Cryptocurrency has risen in popularity within the last year. The cryptocurrency buzz has caught everyone's attention including the IRS. If you were one of those that decided to invest in cryptocurrency, tax time is going to require extra leg work from you. We have complied top 5 things for those who need to know what to do about the taxes for their cryptocurrency.
1. Cryptocurrency is treated as property not currency. Unless, you used it to pay for goods and services. Cryptocurrency held as capital asset are taxed as property. You must pay the long-term capital rate if you sold it after a year, or the ordinary income rate if you sold it before then. Cryptocurrency used to pay for goods and services are taxed as income. If you are an employer paying with cryptocurrency, you must report employee earnings on W-2 forms. The cyrptocurrency value must be converted to U.S. dollars at the current fair maket value at the date of receipt. For this reason, you must keep careful records of the date each payment is made. Self-employed individuals with cryptocurrency gains or losses must report it the same way.
2. When a "miner" successfully "mines" cryptocurrency, the fairmarket value of the virtual currency as of the date of receipt needs to be included in gross income. The IRS wants any earnings from your mining activity to be included in your gross income. Regardless of the currency form your earnings were received. If the miner is self-employed, gross earnings minus allowable tax deductions are also subject to self-employment tax.
3. If you traded one type of cryptocurrency for another you are still obligated to pay taxes. The IRS closed the loophole for "like kind exchanges" where people could swap assets of the same kind and avoid taxes.
4. You can reduce your tax bill by donating your cryptocurrency to charity. Most crypto investors unlikely sold for a loss in 2017. Therefore, you are probably lookig for a way to reduce your bill. Unfortunately, it is too late to donate to charity for the 2017 tax season.
5. Coinbase will most likely NOT send you a 1099. Coinbase will probably only send a 1099-K to large or institutional investors. The site does, however, have transaction record that shows the dates and amounts when you bought and sold.
Cryptocurrency earnings should be reported on Schedule D. You should use Form 8949 to add it all up. If you feel your bitcoin investment is not large enough to alert the IRS for an audit, you may be right to an extent. Large investors are, more than likely, to be audited before smaller invetors. This does not mean you are never at risk for an audit. Coinbase is the only exchange the
IRS has publicly asked for customer records, but rest assure, Kraken and other major cryptocurrency services will soon be asked.
For more information concerning cryptocurrency and taxes the IRS answered some common questions in Notice 2014-21.pe your paragraph here.