The Tax Year is Over. What Now for Crypto?
The 2017 spike in interest in Bitcoin and similar Cryptocurrencies brought with it a renewed degree of scrutiny from tax agencies around the world. As another tax year draws to a close, however, traders, holders, and investors are still largely in the dark with regards to how they should be reporting their taxes on these emerging assets – in spite of the legal requirements to do so accurately.
Unfortunately, this headache is one that is bound to repeat itself on a yearly basis, until individuals seek out software solutions that can answer questions and help make sense of their activity.
A Recap on the IRS’ View
When it comes to taxation, the IRS’ is clear – Cryptocurrency is to be treated as property. Profits from investment or other usage are subject to capital gains tax. Taxable events are triggered in trading cryptocurrencies for cash, other cryptocurrencies, or even sales and purchases of goods or services.
The level of complexity that this entails is entirely dependent on the individual, a buyer that purchases one bitcoin at $3000 and later sells it at $10,000 could easily calculate what’s owed on the $7000 gain. Conversely, an investor buying bitcoin over a time period must keep track of each individual purchase’s basis and later calculate gains/losses on each particular piece sold. Tracking basis grows more difficult with high-frequency traders whose activities are spread out across multiple exchanges and encompass a variety of different cryptocurrencies.
A Light at the End of the Tunnel?
Little additional information has been proffered by the IRS since it released its guidance on cryptocurrency in 2014, much to the dismay of citizens and lawmakers alike. It seems that the issue is gaining some traction: in early April, a group of 21 Members of Congress signed a letter demanding the IRS to “issue needed guidance on the tax consequences and basic reporting requirements for taxpayers that use virtual currencies”, requesting a reply by May 15th.
In particular, the group asked the agency to outline how to proceed with regards to specific identification of assets, acceptable methods for calculating cost basis, and clarification on the treatment of Cryptocurrency hard forks (an issue pushed to the forefront of discussion as a result of the Bitcoin/Bitcoin Cash fork in 2017).
To add to this, the Token Taxonomy Act, introduced in December 2018 by Representatives Warren Davidson (R-OH) and Darren Soto (D-FL), proposes a number of ambitious amendments to existing laws to facilitate the adoption of cryptocurrencies and blockchain-based tokens. Whilst the bulk of the bill is not focused on tax laws, it would also introduce a de minimis exemption for transactions under $600 (other than for transaction for “cash or cash equivalent”) It’s important to note, however, that this increases the importance of diligent record keeping.
The Importance of Audit Trails
However optimistic the shift in regulatory outlook may seem, it will still take some time for any meaningful change to take hold. And while clearer guidance may soon be available to cryptocurrency traders, it will not phase out requirements for audit trails of transactions made. Even those using cryptocurrency for purchases under a possible de minimis exemption need backup such a position.
Participants in the cryptocurrency world would be advised to retrieve records and to continue to store them for every transaction made in cryptocurrency, from acquisition to disposal. Though the temptation may be to put this task off until tax season next year, it is more beneficial to establish a system now than to retroactively comb through wallets in order to compile a list of transactions. For frequent traders, sophisticated software that integrates with exchanges and wallets to automatically generate insights is the best way forward.
Equally important is seeking out advice from tax professionals. Software can track a trader’s history and help understand portfolio activity like income, gains, and losses but meeting with a tax professional can a taxpayer understand what to do with that history. Loss harvesting, self-employment benefits, and foreign account reporting are a few excellent topics to discuss.
Ultimately, experts will be best positioned to assess a given individual’s situation and to guide them through the best practices to ensure they aren’t underpaying/overpaying.
About The Authors
Sean Ryan and Perry Woodin, are the Founders of NODE40. NODE40 Balance is a robust cryptocurrency reporting software that integrates directly with major cryptocurrency exchanges. Members of the blockchain community transacting in, trading, or mining digital currency, have likely triggered a taxable event and can be unaware of how to properly disclose these transactions to the government.
Disclaimer: Blockmanity is a news portal and does not provide any financial advice. Blockmanity's role is to inform the cryptocurrency and blockchain community about what's going on in this space. Please do your own due diligence before making any investment. Blockmanity won't be responsible for any loss of funds.
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