10 Tips for Filing Crypto Taxes
There are only a few more weeks before the
U.S. tax season. The 2020 U.S tax season deadline has historically been
April 15, but due to COVID-19, the official deadline to file tax returns is now
July 15. While the extension comes as a relief for many during this
unprecedented time, do not let the COVID-19 extension lull you into complacency,
as the Internal Revenue Service (IRS) has a spotlight on crypto tax this
tax season. When it comes to crypto tax, the IRS did not hold back this
past year. After announcing an International Compliance Campaign for
cryptocurrency, the IRS published new virtual currency guidance in
October 2019 and sent letters to crypto traders to check their tax
reports. Recently, the IRS has even begun looking for a contractor to
examine crypto tax reports submitted by American taxpayers,
signaling that the IRS is going to take a careful look at the reports in
both civil tax compliance aspects, and — as the last criminal investigation
report mentioned — in criminal aspects. So, now that we understand
the importance of full and accurate reports, here are 10 tips for
complete and accurate crypto tax reporting. This tip can save you
a lot of time and frustration. The more thorough you are, the easier the next
stages will be: According to the IRS guidance, if you receive
cryptocurrency in a peer-to-peer transaction or traded on a non-
facilitated cryptocurrency exchange, you need to establish an
accurate fair market value. The IRS will accept the evidence of fair
market value from a blockchain explorer that calculates the value of the
cryptocurrency at an exact date and time. Tax pros and crypto
holders who do not use an explorer must establish the value as an
accurate representation of the cryptocurrency’s fair market value. This
is why it is highly important to choose a reliable crypto ranking
platform to establish the fair market value. For example, you can
reference historical prices on CoinMarketCap to determine your cryptocurrency’s
fair market value. Every activity is subject to different tax rules. For
example, if you gave someone crypto as a gift, this is not a taxable
event. If you donate crypto, you can get a deduction. Forks, airdrops and
mining can be classified as income. Make sure you are classifying your
digital currency activities with the correct tax definition. Make sure to
understand the IRS rules to calculate capital gains and losses.
You can use capital losses to offset your capital gains as
well as a portion of your regular income. You can carry over the loss to
future tax years until it is exhausted. Based on your activity and prior
reports, you can choose between different calculation methods: First-In-First-
Out (FIFO) Method — the sale cost associated with the coin that was
purchased first is the cost of the coin that you sold first. It does not
necessarily mean that the exact coin has been sold. Specific
Identification Method — identifies the exact coin that the user
sold and calculates their tax liability on the sale of the actual coin based on
the blockchain evidence. You can save a lot of money by choosing the right
method for you. For example, if you got into crypto early and
traded over the years when prices went up, specific identification may be the
right method for you. If you bought your first crypto in late 2017
and since then only sold a few times when the price was at its lowest, consider
using the FIFO method. The IRS guidance instructs you on how to perform
specific identification and determines that if you cannot specifically identify
your crypto, you should use the FIFO method. The IRS clearly states that like-
kind exchange treatment applies to real property and not to exchanges of
personal or intangible property. Choose a platform that will make sure you have
a full report, alert you of missing information, help you understand what
the right calculation method for you is and meet all IRS requirements. If you
have capital gains, use Form 8949, Sales and Other Dispositions of
Capital Assets, and then summarize capital gains and deductible
capital losses on Form 1040, Schedule D, Capital Gains, and Losses. If
you need to report an ordinary income from crypto, use Form 1040,
U.S. Individual Tax Return, Form 1040-SS, Form 1040-NR, or Form 1040, Schedule
1, Additional Income and Adjustments to Income (PDF), as applicable. When
compiling a report and filling out the appropriate documentation, taxpayers must
report all income, gains and losses incurred by all taxable transactions,
regardless of the amount. IRS codes and requirements mean that taxpayers must
maintain thorough documentation on receipts, sales and exchanges in order to
establish validity on their tax returns. This article is intended to be
used and must be used for informational purposes only. It is important to do
your own research and analysis before making any material decisions related to
any of the products or services described. This article is not intended as, and
shall not be construed as, financial advice. The views and opinions expressed in
this article are the author’s own and do not necessarily reflect those of
CoinMarketCap.
There are only a few more weeks before the
U.S. tax season. The 2020 U.S tax season deadline has historically been
April 15, but due to COVID-19, the official deadline to file tax returns is now
July 15. While the extension comes as a relief for many during this
unprecedented time, do not let the COVID-19 extension lull you into complacency,
as the Internal Revenue Service (IRS) has a spotlight on crypto tax this
tax season. When it comes to crypto tax, the IRS did not hold back this
past year. After announcing an International Compliance Campaign for
cryptocurrency, the IRS published new virtual currency guidance in
October 2019 and sent letters to crypto traders to check their tax
reports. Recently, the IRS has even begun looking for a contractor to
examine crypto tax reports submitted by American taxpayers,
signaling that the IRS is going to take a careful look at the reports in
both civil tax compliance aspects, and — as the last criminal investigation
report mentioned — in criminal aspects. So, now that we understand
the importance of full and accurate reports, here are 10 tips for
complete and accurate crypto tax reporting. This tip can save you
a lot of time and frustration. The more thorough you are, the easier the next
stages will be: According to the IRS guidance, if you receive
cryptocurrency in a peer-to-peer transaction or traded on a non-
facilitated cryptocurrency exchange, you need to establish an
accurate fair market value. The IRS will accept the evidence of fair
market value from a blockchain explorer that calculates the value of the
cryptocurrency at an exact date and time. Tax pros and crypto
holders who do not use an explorer must establish the value as an
accurate representation of the cryptocurrency’s fair market value. This
is why it is highly important to choose a reliable crypto ranking
platform to establish the fair market value. For example, you can
reference historical prices on CoinMarketCap to determine your cryptocurrency’s
fair market value. Every activity is subject to different tax rules. For
example, if you gave someone crypto as a gift, this is not a taxable
event. If you donate crypto, you can get a deduction. Forks, airdrops and
mining can be classified as income. Make sure you are classifying your
digital currency activities with the correct tax definition. Make sure to
understand the IRS rules to calculate capital gains and losses.
You can use capital losses to offset your capital gains as
well as a portion of your regular income. You can carry over the loss to
future tax years until it is exhausted. Based on your activity and prior
reports, you can choose between different calculation methods: First-In-First-
Out (FIFO) Method — the sale cost associated with the coin that was
purchased first is the cost of the coin that you sold first. It does not
necessarily mean that the exact coin has been sold. Specific
Identification Method — identifies the exact coin that the user
sold and calculates their tax liability on the sale of the actual coin based on
the blockchain evidence. You can save a lot of money by choosing the right
method for you. For example, if you got into crypto early and
traded over the years when prices went up, specific identification may be the
right method for you. If you bought your first crypto in late 2017
and since then only sold a few times when the price was at its lowest, consider
using the FIFO method. The IRS guidance instructs you on how to perform
specific identification and determines that if you cannot specifically identify
your crypto, you should use the FIFO method. The IRS clearly states that like-
kind exchange treatment applies to real property and not to exchanges of
personal or intangible property. Choose a platform that will make sure you have
a full report, alert you of missing information, help you understand what
the right calculation method for you is and meet all IRS requirements. If you
have capital gains, use Form 8949, Sales and Other Dispositions of
Capital Assets, and then summarize capital gains and deductible
capital losses on Form 1040, Schedule D, Capital Gains, and Losses. If
you need to report an ordinary income from crypto, use Form 1040,
U.S. Individual Tax Return, Form 1040-SS, Form 1040-NR, or Form 1040, Schedule
1, Additional Income and Adjustments to Income (PDF), as applicable. When
compiling a report and filling out the appropriate documentation, taxpayers must
report all income, gains and losses incurred by all taxable transactions,
regardless of the amount. IRS codes and requirements mean that taxpayers must
maintain thorough documentation on receipts, sales and exchanges in order to
establish validity on their tax returns. This article is intended to be
used and must be used for informational purposes only. It is important to do
your own research and analysis before making any material decisions related to
any of the products or services described. This article is not intended as, and
shall not be construed as, financial advice. The views and opinions expressed in
this article are the author’s own and do not necessarily reflect those of
CoinMarketCap.
