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Cryptocurrency Tax Preparation

All US citizens must report and pay taxes on income from bitcoin and other cryptocurrencies on your tax returns. An IRS Notice from 2014 says bitcoin and other digital currencies are property for tax purposes, and not currency hence they need to be accounted for as asset sales on your tax return, even if you use your crypto to buy a cup of coffee (or that infamous 10,000 BTC Pizza purchase back in 2010).

The IRS has already sued Coinbase to get them to release their KYC information. They will be going after those to do not declare their transactions. Earlier this year, the IRS also signed a contract to track bitcoin transactions with a well-known crypto tracking company. Do not think that because crypto transactions are online, that they are not taxable. Note, if you are a HODL’r you don’t have to claim anything until you sell or send your crypto. Every transaction must be reported.

Your time is valuable, you can either spend it researching the next big ICOs or waste it trying to research the tax law, determine which forms to use, and figure out how to calculate your capital gains, let Genesis Tax Consultants, LLC prepare your tax return. Save time and remove the chance that you’ll do it wrong by hiring Genes to prepare your federal and state income tax return

 

Are you a Crypto Trader? We Have Your Taxes Covered. 

Nicholas Hartney, EA is an Advanced Crypto Tax Expert (ACT-E).

Last year in Frankfurt, Germany I had consulted a group of cryptocurrency traders and told them I expected the IRS to at some point in the near future to being looking into the crypto market.  In 2016 the IRS reported that only 802 reported their Bitcoin.  In March 2017 the IRS initiated a cryptocurrency suit, filing in the San Francisco federal district court requesting customer data from Coinbase. Of course the IRS won this case late in the year and Coinbase is now issuing 1099-Ks to it's traders, with copies going to the IRS.  This means if traders do not report their trades they can expect a letter from the IRS and penalties for underreporting their income. 

COINBASE DEVELOPS NEW ONLINE TAX REPORTING TOOL

In December 2017, Coinbase added a tax reporting tool, displaying to users their capital gains and losses using the first in first out (FIFO) method.  Normally, a 1099-B would be issued from a broker or barter exchange for each client for whom they sold stocks, commodities, future contracts, debt instruments, options, etc. However, Coinbase is issuing Form 1099-K, as they are a third-party payment network which changes fiat into crypto and vice versa. The Form reports the aggregate, gross value of certain transactions for customers over a calendar year.  The Form does not report your actual tax payment owed to the IRS, this is where you need an accountant. 

CAPITAL GAINS AND LOSSES

Investors in cryptocurrencies who sold (coin-to-currency), exchanged for other coins (coin-to-coin), or used their coins to purchase other items such as goods and services, have to report a capital gain or loss on each of these transactions.  Con fees and other expenses need to be added to the basis appropriately (to offset your gain or increase your loss).  

Often times coin deals naturally generate taxable income, including mining income.  To look at an example of a transaction consider that you sold Bitcoin for U.S. dollars, this is a noticeable capital gain or loss reportable on IRS Form 8494.  Also, if you are a coin miner who receives a coin for your work, you will recognize business revenue based on the value of the coin against the expenses you incurred obtaining the coin. 

WHEN YOU NEED TO IMPUTE INCOME

The issue for the IRS is that most other coin transactions are not evident for tax reporting, including coin-to-coin trades, hard forks, and using a coin to purchase goods and services.  The coin investor should "impute" a sales or exchange transaction to report a capital gain or loss on coin-to-coin trades and using a coin to purchase items.  Many coin investors and their accounts overlook or mishandle this reporting and underpay the IRS, which leads to substantial penalties and interest that compounds daily.  

The IRS labels cryptocurrencies as intangible property, as it has no physical substance.  Coin users may refer to is tas digital currency, or digital money however it is not sovereign government-issued currency.  This is the key: Each transaction of fiat money (i.e the U.S. dollar or Euro) is not a taxable event; it would be ridiculous to have to report a capital gain or capital loss every time you purchased any product or service with either cash or a card. But this is the reality when paying with crypto coins. 

All US citizens (and expats) must report and pay taxes on income from bitcoin and other cryptocurrencies on your tax returns. An IRS Notice from 2014 says bitcoin and other digital currencies are property for tax purposes, and not currency hence they need to be accounted for as asset sales on your tax return, even if you use your crypto to buy a cup of coffee (or that infamous 10,000 BTC Pizza purchase back in 2010).

The IRS has already sued Coinbase to get them to release their KYC information. They will be going after those to do not declare their transactions. Earlier this year, the IRS also signed a contract to track bitcoin transactions with a well-known crypto tracking company. Do not think that because crypto transactions are online, that they are not taxable. Note, if you are a HODL’r you don’t have to claim anything until you sell or send your crypto. Every transaction must be reported.

Genesis-Tax-Consultants-Crypto-Tax-Preparation

Worry about your next ico and leave your taxes to us

The problem I am seeing is that people who invest with cryptocurrency are asking if I am an "expert" with "extensive knowledge" with its taxation and if not if I can refer them.

They do not seem to like the truth I tell them which is, as this article points out, there is not a big enough market for anyone to be an "expert" with "extensive knowledge" of crypto because:

1) The small number of people who have been reporting their trades,

2) the IRS just started to receive 1099-Ks from Coinbase, and

3) There is no magic to taxation for crypto as the IRS treats it as a capital asset. Any tax preparer who has ever dealt with capital assets, i.e. stocks, bonds, etc. can get the job done; whether if you are a miner (Schedule C) or a trader (Form 8949, Schedule D).

4) The Internal Revenue Service revealed new details about its investigation into tax evasion related to bitcoin, filing court documents that suggest only a tiny percentage of virtual currency owners are reporting profits or losses in their annual returns.

The new documents, filed Thursday in San Francisco federal court, come in the midst of a closely-watched legal fight between the IRS and Coinbase, a popular service for buying and selling bitcoins that hosts over a million customer accounts.

The dispute began last year when the IRS issued a sweeping summons for Coinbase to turn over a vast amount of customer data, including every customer account as well as detailed transaction records.

Coinbase claimed the IRS demands are illegally broad and refused to comply, which in turn led the IRS to file a federal lawsuit last week to enforce the summons.

While the lawsuit did not come as a surprise, a new affidavit from IRS agent David Utzke reveals additional information about how the agency is conducting the investigation. Specifically, Utzke explains he ran a computer analysis against the IRS’s repository of hundreds of millions of tax records, and found fewer than a thousand people filed a Form 8949 to account for a “property description likely related to bitcoin.”

Form 8949 is used to report capital losses and capital gains and, under current IRS rules, would require bitcoin owners to declare their profits. In some cases, the profit could be significant given the virtual currency soared from $13 to over $1,100 during the three year period (2013-2015) for which the agency is seeking information.

Here is a paragraph from Utzke’s affidavit that states only 802 individuals filed a bitcoin-related Form 8949 in 2015(emphasis mine):

The IRS searched the MTRDB for Form 8949 data for tax years 2013 through 2015. I received the results of those searches. Those results reflect that in 2013, 807 individuals reported a transaction on Form 8949 using a property description likely related to bitcoin; in 2014, 893 individuals reported a transaction on Form 8949 using a property description likely related to bitcoin; and in 2015, 802 individuals reported a transaction on Form 8949 using a property description likely related to bitcoin.

It’s impossible to know what percentage of Coinbase customers these numbers represent, but it’s likely only a small fraction. Even though some Coinbase accounts belong to non-U.S. citizens, and many others did not have any transactions (and therefore did not trigger any capital gains), it’s possible an IRS review of the accounts could identify hundreds of thousands of individuals who should have declared bitcoin income.

Trading cryptocurrency is a taxable event much like a stock trade according to a 2014 IRS Notice which deemed crypto as property for tax purposes. Many crypto traders were misinformed about the requirements to report and pay capital gains taxes on their trades or to pay income tax on their mining activity.

In 2017, a few things changed. First off, the awareness of the crypto space grew out of from primarily being techies and insiders to include the majority of Americans having at least an awareness of things like bitcoin and blockchains.

Next, the IRS had previously sued Coinbase to uncover the KYC (Know Your Customer) data for the people who had traded crypto on the exchange. In 2015, only 800 or so people actually claimed their crypto trades on their tax returns. The IRS won that case in December 2017 and that has started to have many of these traders want to come into compliance for previous years and also give the millions of traders who started their trading activities.

Anyone selling themselves as an expert is simply taking advantage of a niche market they expect to grow. My advice is to go with an experienced tax preparer.

Your time is valuable, you can either spend it researching the next big ICOs or waste it trying to research the tax law, determine which forms to use, and figure out how to calculate your capital gains, let Genesis Tax Consultants, LLC prepare your tax return. Save time and remove the chance that you’ll do it wrong by hiring Genes to prepare your federal and state income tax return.  We can request from the IRS directly, all 1099-Bs and other income forms that have been submitted to the IRS under your SSN for you.  

No gimmicks, we don't prepare fancy charts showing your losses or gains, we just prepare your taxes.  You can upload all your documents to your own personal secure file sharing portal we will assign to you.  No need to come in the office, just submit the documents, we will email you with any questions and advice and get your return completed timely so you can focus on making profits. 

 

 
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Cryptocurrency Tax Basics You Should Know

 In 2014, the Internal Revenue Service (IRS) made it clear that virtual currency will be taxed as a capital asset, provided they are convertible into cash; meaning that capital gains rules apply to any gains or losses. Sounds simple enough right? Here is why it may not be as easy as that:

  • Buying and selling cryptocurrency for speculative investment purposes will have gains and losses, basis, holding period and a triggering event calculated the same as when purchasing and selling stocks.

  • Using cryptocurrency to pay for goods or services, or to buy other cryptocurrencies is a triggering event for tax purposes, meaning the result will usually end up in a loss (but the possibility remains for a gain or wash).

More complicated cryptocurrency tax issues:

How do you calculate capital gains on cryptocurrency?

For tax and accounting purposes, capital gains and losses are calculated by determining how much your cost basis has gone up or down from the time you acquired the cryptocurrency until a taxable event is triggered.

How to calculate the basis in cryptocurrency:

Basis is the cost that you paid for the cryptocurrency. The actual cost is sometimes referred to as "cost basis" because you can make adjustments to basis over time. For example, if you add to the asset, either as a new purchase or a reinvestment, your basis is your cost plus the cost of each subsequent purchase/reinvestment.

Coinbase has a new online tax report

On July 6, 2017, the IRS narrowed its summons against Coinbase, the most substantial U.S.-based coin exchange, to retrieve larger customers’ trades and other transactions to find unreported income. In late-December 2017, Coinbase added tax reporting of capital gains and losses using first in first out (FIFO). This move should undoubtedly please the IRS since there is no 1099-B issuance on coin trades.  The bottom line...if you used Coinbase you can be assured the IRS knows you are making trades. 

When I trade cryptocurrency on an exchange, I pay commissions and fees. How do I treat those costs?

When you calculate the basis of your cryptocurrency, you will figure the purchase price plus any related costs, such as commissions. Fees are treated differently.  If you pay investment-related fees, then you may be able to deduct the fees on your Schedule A, assuming you itemize. But that's only for 2017. The new tax reform law eliminated the deduction for 2018 through 2025 but there is a work-around: If, instead of owning cryptocurrency personally, your business owns the investments, you can deduct investment-related fees on a Schedule C (or your entity's tax form).

What is considered a taxable event when dealing with cryptocurrency?

A taxable event occurs after a sale or disposition of an asset. When it comes to cryptocurrency, a taxable event occurs whenever it is traded for cash or other cryptocurrency or whenever cryptocurrency is used to purchase goods or services.

There's also another potentially complicating factor. The IRS doesn't require third-party reporting for virtual currency (yet) so there's no form 1099-B or equivalent issued at the end of the tax year. Some companies like Coinbase will offer a summary of transactions which can be used to help you file your taxes but if you withdraw cryptocurrency from an exchange, the exchange can no longer track when happens. In that way, it's the same as taking money out of your bank. For that reason, cashing cryptocurrency out of an exchange or similar platform may be treated as a sale - even if the withdraw is forced. 

What is a holding period? 

The holding period is the time you acquired the cryptocurrency until the time of the taxable event (i.e. you sold it, exchanged it for other cryptocurrency, or used it to purchase goods or services).  

  • Holding your cryptocurrency for more than one year before a taxable event is considered a long-term gain or loss.

  • Holding your cryptocurrency for one year or less before a taxable event is considered a short-term gain or loss.

For example: Kevin bought 100 shares of stock on Jan. 1, 2018. To determine his holding period, he should begin counting on Jan. 2, 2018. The second day of each month thereafter counts as the beginning of a new month, regardless of how many days each month contains. If he sells the property on Jan. 1, 2019, his holding period will be one year or less and he will realize a short-term capital gain or loss. If he sells the property on Jan. 2, 2019, his holding period will have been one year and a day, and he will realize a long-term capital gain or loss. 

Capital Gains Rate vs. Ordinary Income Rates

The capital gains rates can be favorable to taxpayers. For 2017 (the return that you'll file when tax season opens in January 2018), capital gains rates for long term gains (those held more than a year) range from 0% to 20%. Short-term capital gains are taxed as ordinary income, which means your marginal tax rate will apply to your short-term gains as well (in 2017 ordinary tax rates are 15%, 25%, 28%, 33%, 35%, and 39.6%).  After 2018 the tax rates go to 10%,12%,22%,24%,32%,35%, and 37%.   So if you make more than $37,950 in 2017 you will be in the 25% tax bracket, so you would end up paying at least 5% more than you would on a short-term gain than you would on a long-term capital gain. 

What happens when you lose money on cryptocurrency? 

If your realized losses exceed your realized gains, you have a capital loss for tax purposes. You can claim up to $3,000 (or $1,500 if you are married filing separately) of capital losses and the amount of your loss offsets your taxable income for the tax year. If your losses exceed those limits, you can carry the loss forward to later years subject to certain limitations and restrictions.

What are realized gains and losses?  

Cryptocurrency has been up and down over the past year. For tax purposes, you mostly care about the beginning and the end: what happens in the middle doesn't really count. For example, every time that Bitcoin takes a dive, that doesn't equal a real, or realized loss. Similarly, when it goes back up, that doesn't equal a real, or realized gain. To realize a gain or a loss for tax purposes, you have to do something with the asset. Typically, that means that you sell it or otherwise dispose of it - generally, the taxable event mentioned earlier.

Here's a quick example to help you sort out the math: Assume you invest in Bitcoin worth $1,000. Over the year, assume that the value of the Bitcoin climbs to $25,000 due to market conditions and not any additional investment on your part. You continue to hold onto it. Result? Unrealized gain, no capital gain. Now assume that the value of Bitcoin takes a hit and it falls to $500. Result? Unrealized loss, no capital loss. Finally, assume that Bitcoin climbs back to $750 and you get rid of it. Result? You have a realized capital loss of $250 ($750 selling price – $1,000 basis). You take the loss at the basis, not the high price (the $25,000 high value is meaningless for purposes of capital gain or loss) nor at the low price (the $500 low value is similarly meaningless for purposes of capital gain or loss). You want it to mean something. But it doesn’t. At least not for tax purposes.

Tax Cuts and Jobs Act and coin traders

Starting in 2018, the Tax Cuts and Jobs Act limits Section 1031 like-kind exchanges to real property, not for sale. Investors may not use it on artwork, collectibles, and other tangible and intangible property, including cryptocurrencies.

So where do I report my gains or losses?

At tax time, you’ll report your realized gains and losses on a Schedule D attached to your Form 1040, Individual Income Tax Return, where you will transfer the results to the reconciliation page.  You will not file a Schedule D if you do not have any realized gains or losses: even if the value changes, if there's no sale, exchange, or use for products and services there is no taxable event to report.

So what if I invest in cryptocurrency outside of the United States. I know that I have to report brokerage accounts and other assets on an FBAR. Does that apply here?

As of the date of this post, you do not have to report your cryptocurrency on your FBAR. In 2014, the IRS issued a statement, saying, "The Financial Crimes Enforcement Network, which issues regulatory guidance pertaining to Reports of Foreign Bank and Financial Accounts (FBARs), is not requiring that digital (or virtual) currency accounts be reported on an FBAR at this time but may consider requiring such accounts to be reported in the future." The IRS has confirmed that position for 2017 taxes.

Since I don't have to report it on an FBAR, what happens if I just don't report it all, anywhere?

The IRS has been cracking down on cryptocurrency reporting. They've made some headway into investigating potentially unreported transactions, including some initial success in legal efforts to force Coinbase to turn over customer records. It's likely not an isolated push: In the Coinbase matter, IRS Senior Revenue Agent David Utzke noted that for the 2013 through 2015 tax years, the IRS processed, on average, just under 150 million individual returns annually. Of those, approximately 84% were filed electronically. IRS matched data collected from forms 8949, Sales and Other Dispositions of Capital Assets, which were filed electronically and found that just 807 individuals reported a transaction on Form 8949 using a property description likely related to bitcoin in 2013; in 2014, that number was just 893; and in 2015, the number fell to 802. The IRS argues that those numbers indicate that taxpayers aren't reporting or paying tax on cryptocurrency transactions.

It is no secret that the Internal Revenue Service is making reporting cryptocurrency a compliance priority. Stay ahead of the game by making sure your records and tax reporting are above-board, if not end up paying hefty penalties and interest on unreported income (not to mention the potential of jail time, yikes!).