An As Simple As it Gets Breakdown of Cryptocurrency and Taxes

To summarize the tax rules for cryptocurrency in the United States, cryptocurrency is an investment property, and you owe taxes when you sell, trade, or use it. With that said, “the character of a gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer.”[1][2]

That is the gist of cryptocurrency and taxes in the U.S., below we explain some details and clarify the implications of the above.

NOTE: We aren’t tax professionals and can’t offer tax advice. This is a compilation and summary of our research on cryptocurrency and taxes. Make sure to see the official guidance below and contact a tax professional if you did any substantial amount of trading in 2017 – 2018.

A Summary of Cryptocurrency and Taxes in the U.S.

Here is the bottom line on cryptocurrency and taxes in the U.S. for investors/traders (it can be gleaned from the official IRS guidance from 2014; you’ll need to reference Publication 544 as well):

  • For tax purposes in the U.S., cryptocurrency is treated as property (a capital asset like stocks, bonds, and other investment properties). It is not treated as a currency; it is treated like real estate or gold. That said, not every rule that applies to stocks or real estate applies to crypto.
  • Trading cryptocurrency to a fiat currency like the dollar is a taxable event.
  • Trading cryptocurrency to cryptocurrency is a taxable event (you have to calculate the fair market value in USD at the time of the trade; good luck with that).
  • Using cryptocurrency for goods and services is a taxable event, i.e., spending cryptocurrency is a “realization event.” You have to calculate the fair market value in USD at the time of the trade; you may also end up owing sales tax.
  • Buying cryptocurrency with USD is not a taxable event. You don’t realize gains until you trade, use, or sell your crypto. If you hold longer than a year you can realize long-term capital gains (which are about half the rate of short-term).
  • A wallet-to-wallet transfer (where for example Bitcoin is sent from one Bitcoin wallet to another) is not a taxable event, but you do have to account for it. Be aware that some exchanges may treat wallet-to-wallet transfers as taxable as a “safe harbor” (so make sure to check their records against your own).
  • Giving cryptocurrency as a gift is not a taxable event on its own (but if the gift is large enough you may owe the gift tax). The recipient of the gift inherits the cost basis. So if you bought .1 BTC for $100, when the recipient sells or trades it they owe taxes on profits over $100.[3][4]
  • You owe taxes when you sell, trade, or use forked coins or coins you mined. Generally speaking, a forked coin would have a cost basis of $0 (you paid nothing for it), a mined coin would have the cost basis of its dollar value at the time of mining (its value in USD at the time it was recived).
  • Mining and using crypto as a business have unique considerations (see IRS guidance above). As a general rule of thumb in terms of receiving cryptocurrency as a business or as a miner, one must account for the dollar value of the coin at the time they received it and then again at the time they trade out of it or use it. If you pay someone in crypto you’ll need to report that as well (for example if you pay an employee in crypto or if you pay a contractor over $600 worth of crypto). Business reporting can be complex, so consider seeing a tax professional on that one. Assume receiving crypto as a miner or business is a taxable event.
  • For 2017, it isn’t clear if you can claim like-kind property exchange (which would result in you not having to realize gains and losses on trades). After December 31, 2017, 1031 exchanges are limited to real estate. Thus, unless there is clarification, you’ll owe taxes on all crypto trades in 2018 and forward (but might be able to claim like-kind with the help of your accountant in 2017). See Forbes Loophole Allows Tax-Free Bitcoin Exchanges Into 2018 for a breakdown of what may or may not be possible.[5]
  • To find out what you owe you have to tally up your gains and losses in a year and deduct this from your cost basis. Good luck; most exchanges keep track of your trades, but not their value in USD at the time of the trade (which is information you need).
  • If you don’t know the exact fair market value at the time of the trade or use of cryptocurrency, use your best reasonable estimates. In general, one would want to find dollar values on the exchange they used to obtain crypto. If you didn’t use an exchange, then consider using the dollar value on an exchange you would have used (be wary of using average dollar values from multiple exchanges, as you’ll be factoring in exchange you couldn’t have used). Make sure to be consistent in how you track dollar values. TIP: Consider keeping your own records. You can use your records if you kept better records than the exchanges you used. Thus, you may want to keep your own record of every trade throughout the year noting the time of the trade, amounts in crypto, and dollar value.
  • FIFO rules should be optional. You should be able to choose between “First in First Out” FIFO and “Last in First Out” LIFO (and potentially a few other calculation methods, check with your CPA). Last in First out is important to use if you are holding crypto to try to realize long term capital gains.
  • The wash rule likely doesn’t apply to crypto. Section 1091 wash sale rules only mention securities, not intangible property.
  • There are loopholes in the new tax bill that let high-frequency traders use passthrough businesses to benefit (essentially you would create an LLC for your trading). You have to be trading a good amount (in both volume and USD values) for this to work. See a professional for advice if you think this applies to you.
  • You must make a good faith effort to claim your crypto and pay your taxes no matter which route you take.
  • Trying to hide your assets is tax evasion, a federal offensive.
  • Making a good faith effort, but getting it wrong, results in a fee.
  • If you think you maybe might owe taxes from past years, file an amended return and get right with the IRS before they come looking for you. See: IRS Offers Tips on How to Amend Your Tax Return.
  • When you file, be consistent. You can’t do FIFO over here, like-kind over there, wash rule here but not there, etc.

Cryptocurrency and Taxes Q&A

Below are some questions and answers pertaining to cryptocurrency and taxes.

There is crypto tax software that can potentially help. There are a number of crypto tax software solutions to be found online. In general you need to pay a fee to use the software then give the software READ ONLY access to your trading history via an exchange’s API, import data from a CVS file, or enter it by hand (you can also give it access to wallet data). This can produce something your account can work with (the raw transaction data isn’t going to have dollar values and this could, understandably, be too much for your CPA to handle). I have reviewed one option Cointracking.info (click this link for a review), but here is how you search for more of them to research yourself: “name of exchange + tax calculator” or “cryptocurrency tax software.” You will need to double check the software’s work against your own records, but for those who did a lot of trading this sort of software could be a necessity (figuring out fair value USD for many trades is next to impossible, the software even with all its headaches… is likely to save you a headache).

If you did anything other than hold, you should see a tax professional ASAP (a local CPA for example). The lack of clarification this year, plus the Coinbase lawsuit, hints at the idea that the IRS will have its eye out for traders who moved more than $20k in crypto. You must make a good faith effort if you moved more than $20k in crypto (even just between wallets). Further, you have some additional tax responsibilities if you make more than $1k in capital gains in a year (see below).

Do I owe taxes on cryptocurrency even if I never cashed out? Putting together all the above points, one may owe taxes on cryptocurrency even if they have never sold cryptocurrency for US dollars and never cashed out to their bank account. Remember, trading and using cryptocurrency are both taxable events where the taxable amount is calculated from the fair market value in U.S. dollars at the time of the event. So if you spent the year trading Bitcoin to Ethereum on GDAX or Bittrex, then you realized short-term capital gains or losses with each trade and ow taxes on that.

How capital gains and losses work? All capital gains and losses realized in a tax year (Jan 1 – Dec 31) are weighted against each other and subtracted from your initial investment (your cost basis). Then you owe taxes on profits in that year (or you realize losses). You aren’t double taxed, it doesn’t matter if you did countless small trades or one big trade, capital profits and losses work the same way, the only difference is the amount of work it takes to do your reporting. The short-term rate is very similar to the ordinary income rate. The long-term rate (on assets held over 365 days) is about half the short-term rate. Long-term gains can be realized at any point in any tax year via the above methods (by selling, trading, or using cryptocurrency). Please note that if you calculate your gains and losses as “first in first out,” you realize all your long-term gains first (thus, you may want to see if “last in first out” works better for you). Lastly, on $3k in losses can be carried over between years (so if you have more losses than gains, you can only bring $3k worth forward each year to offset future gains).

How capital gains tax relates to ordinary income and the progressive tax system: Capital gains and ordinary income are both counted toward your adjusted gross income (income after deductions). Your adjusted gross income affects your tax bracket for both ordinary income and capital gains. The U.S. has a progressive tax rate on ordinary income and capital gains, that means you pay progressively higher rates based on your adjusted gross income. You don’t just pay the top amount you qualify for on all dollars you earn. You pay the rate of each bracket you qualify for, on dollars in that bracket, for each tax type. If you don’t understand how progressive taxation works, see an explanation of the progressive tax system.

What form do I use to calculate gains and losses? Although it isn’t the only form you might need to file, Form 8949 Sales and Other Dispositions of Capital Assets is the form one would use to report capital gains and losses from selling, trading, or using cryptocurrency. Traders may also want to have Form 8824 Like-Kind Exchanges on hand.

What other forms do I need to file for cryptocurrency? You might also need Form 4684 Casualties and Thefts (if for example, you had a hard drive that stored crypto damaged in a hurricane; form 2210 for underpayments of quarterly taxes (explained in the next section); and Form 8938 Statement of Foreign Financial Assets if you used a foreign exchange. See: Golding & Golding’s Understanding the Rules of Bitcoin Reporting for FBAR & FATCA.[6]

When do I pay taxes on crypto gains, do I Have to file quarterly for crypto trading? The U.S. has a pay-as-you-earn tax system. When you get your check from your job, taxes are withheld. When you run a business, you pay quarterly taxes. When you make enough capital gains, it is the same deal. If you would owe more than $1,000 in taxes in the short or long-term capital gains tax rate for the year, then you should be making quarterly payments. If you wouldn’t owe more than $1,000, you can make an annual payment instead. If you have to file quarterly, then you need to use your best estimates. If you overpay or underpay, you can correct this at the end of the year. There is a fee for not making estimated quarterly payments when required, and if you underpay too much, there is a fee for that too. See: Large Gains, Lump Sum Distributions, etc. and Publication 505 (2017) Tax Withholding and Estimated Tax. If you overpaid, make sure to read up on: Form 2210 Underpayment of Estimated Tax by Individuals, Estates and Trust. NOTE: To owe $1,000 in capital gains you have to make enough profit to realize $1,000 over the course of a year at your tax rate. Profits are not the same as the gross dollar amount traded, profits are calculated from all capital gains and losses in a year.

You must make estimated tax payments for the current tax year if both of the following apply: 1) You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits, and 2) You expect your withholding and refundable credits to be less than the smaller of: a) 90% of the tax to be shown on your current year’s tax return, or b) 100% of the tax shown on your prior year’s tax return. (Your prior year’s tax return must cover all 12 months.)

– IRS: Large Gains, Lump Sum Distributions, etc.

TIP: It can make life simple to cash out before midnight on December 31 and start again next year (as that would ensure all gains and losses are set in stone before the end of the tax year). Likewise, going all in on crypto that you don’t currently hold has a similar effect (if you treat crypto-to-crypto trades as a taxable event). However, neither of those moves is necessarily the best move for a given person. Those moves potentially hit the reset button on the one hand, ensuring all the year’s gains and losses stay in that year, but realizes all gains and losses on the other hand (meaning you are no longer “going long” on any crypto investments). The problem here is that if like-kind applies, then cashing out limits your options. The lack of clarification doesn’t help for planning ahead, but it is what it is. Play it safe and see a professional before you go panic selling or trading due to tax implications. In general, if you are unsure, then do what you would do if there were no tax implications and be ready to pay taxes on profits.

What other forms do I need to file for cryptocurrency? You might also need Form 4684 Casualties and Thefts (if for example, you had a hard drive that stored crypto damaged in a hurricane; Form 2210 Underpayment of Estimated Tax by Individuals, Estates and Trusts for underpayments of quarterly taxes (explained in the next section); And Form 8938 Statement of Foreign Financial Assets if you used a foreign exchange. See: Golding & Golding’s Understanding the Rules of Bitcoin Reporting for FBAR & FATCA.[7].

On Cryptocurrency Mining and Taxes: When you mine a coin you have to record the cost basis in fair market value at the time you are awarded the coin (that is profit on-paper). Then you account for further profits or losses when you sell that coin (so as long as you sell it within the year, you can’t owe more than you made if the value of the coin goes down). From there, as long as you are making enough to qualify as being self-employed and not mining as a hobby, you can deduct the cost of equipment and electricity, and then you pay taxes on the profit. In general you owe the self-employment tax if you make over $400. If you made over $400 and would owe the self-employment tax, it is reasonable to consider yourself self-employed for the purposes of mining and file that way. Just make sure to follow the rules presented by the IRS. See: IRS Self-Employed Individuals Tax CenterCan I Deduct Mining Costs?, What you Need to Know About Bitcoin Mining and Taxes, and the above IRS guidance on cryptocurrency (it includes a section on mining).

On Cryptocurrency and Business: Generally speaking, getting paid in cryptocurrency is like being paid in gold. It is income in the form of an investment property. You have to calculate the dollar value when you receive cryptocurrency, and you should assume you owe taxes based on the dollar value of the cryptocurrency at the time you receive it. Later, you would calculate dollar values again when you trade out of cryptocurrency (by trading, selling, or using it) and account for profits/losses at that time. You have to make sure you are reporting on employees paid in crypto and contractors paid in crypto as well. Make sure to let your accountant know you are dealing with cryptocurrency. Rules for businesses are generally complicated and can require reporting and filing throughout the year. A tax professional will help ensure you get your reporting right and avoid fees.

WARNING: If you make great gains this year on-paper and traded crypto-to-crypto or crypto-to-dollars, but then crypto goes to heck next year, you could end up owing a ton of money to the IRS you don’t have. You could run into real problems if crypto goes to zero (very unlikely) or if you panic and sell low. Seek guidance from a professional before making rash moves. Like-kind rules could potentially get you out of a mess like the cases noted above, but you’ll need to file forms and attest to a very specific situation. You can’t do this alone; you must seek professional assistance. Even if you do file like-kind, the IRS can say “no” and send you a bill. Don’t put it “all on crypto” if you don’t have the fiat to cover the tax implications. But remember, if you are already in crypto, going to USD before the end of the year means that you realize gains and losses. There are way more considerations than there is time, next year make sure you are prepared well in advance. Fingers crossed the IRS bothers to provide guidance beyond the 2014 guidance moving forward (with the 1,000%+ rise in the price of crypto assets and all it would only make sense).

Get $10 in free Bitcoin when you sign up at Coinbase and buy or sell $100 in Cryptocurrency
Citations

  1. the Official IRS Guidance from 2014
  2. IRS Publication 544
  3. Bitcoin Tax Guide: Gifts And Tips. TurboTax.com.
  4. The Gift Tax.Investopedia.com.
  5. Loophole Allows Tax-Free Bitcoin Exchanges Into 2018. Forbes.com
  6. Golding & Golding’s Understanding the Rules of Bitcoin Reporting for FBAR & FATCA. GoldingLawyers.com.
  7. Golding & Golding’s Understanding the Rules of Bitcoin Reporting for FBAR & FATCA. GoldingLawyers.com.

What do you think?

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Andrew on

I think I’m slightly confused as to what happens once the gain or loss is realized when there are multiple transactions on a row, as when one tries to convert an altcoin to fiat.

Say I have a single coin of EXAMP that I purchased for BTC worth $10. I want to sell it for USD once it is worth $15. When I make the EXAMP/BTC trade, the $5 gain is realized and taxed. But when I sell the BTC back to USD, is the $5 taxed again, or does it count as part of the “capital” of the BTC/USD transaction and therefore not taxed (unless there’s a radical shift in BTC value between the execution of the two transactions)? And if the gain is taxed a second time, is the whole $5 taxed or just the remaining gain after the first taxation?

Andrew on

To clarify, by “capital” in that last part, I meant to ask would the $5 become part of the cost basis for any gained or losses in the BTC/USD transaction.

Thomas DeMichele
Thomas DeMichele on

In your example, since you already realized profits on the first trade, you don’t re-realize them on the second trade. You had $10, you profited $5 and got $15, you didn’t profit the second time when you sold back to USD (as you already had $15 worth of value). Your first trade was the equivalent of selling the USD just like your second one was.

If I buy $15 of BTC and then sell it (with no fees), then I buy it, then I sell it, again and again, if there is no profit, there is no capital gains to tax and no capital losses to tally.

Trading and selling are taxable events where you realize profits, you pay gains on profits. The fact that they are taxable events are irrelevant (from the standpoint of paying a capital gains tax) if you aren’t realizing gains or losses on a trade or sale.

Russ on

Than there is no point (in given by Andrew example) to sell EXAMP for BTC as long as he should report to IRS gain/loss of BTC to equivalent to $US. It looks like all trades in US should be done in $US. Am I right?

Thomas DeMichele
Thomas DeMichele on

There are lots of reasons to trade crypto-to-crypto, one reason being some coins can only be bought using crypto. You just have to keep in mind that you’ll need to record profits/losses in the USD value at the time of the trade.

Nash on

Hi. Great post but just want to clarify using an example…

1. Jan 1 – I bought 1 BTC for $100

2. Feb 1 – I bought 100 LTC worth 0.5 BTC (when the value of BTC was $200), essentially making a profit of $50 on the BTC trade.

3. Mar 1 – I sold the 50 LTC for .8 BTC (essentially i bought BTC as my BTC amount increased). Assuming, BTC was at $300, i made a gain of $140 (.8 x 300 – $100 cost basis). Now i end up with 1.3 BTC in total.

4. Apr 1 – converted the 1.3 BTC back to USD when BTC was at $300.

In the above example, I am clear about step 1, 2 and 3. However, I am not sure about Step 4. Do i again pay tax on the conversion from BTC to USD? And if so, wouldnt that be akin to double taxation?

Thank you.

Thomas DeMichele
Thomas DeMichele on

Details aside, here is the logic:

A trade from BTC to USD and a trade from crypto to crypto are effectively the same thing for tax purposes. If you made profits and losses on crypto-to-crypto trades, and then you trade back to USD with no profit or loss on that trade, then that last event doesn’t add to profits or losses. It doesn’t matter that you went into USD.

If on the other hand the trade to USD resulted in profits or losses, then that just like all the other trades would add to the total profit or loss.

Jim on

What to do with trades before IRS guidance? Many exchanges went out of business and all trades data with them going back to 2013 and partially to 2014.

If I take my TOTAL USD I used to buy crypto with and subtract the total crypto sold in the same year back to USD, is that a reasonable number I can use for gain/loss ?

LIke 2017:
Total buying crypto: $6000.
Total selling crypto (emptying wallet): $6500.

Profit: $500

Is that ok?

So confusing…

Thomas DeMichele
Thomas DeMichele on

I would say that is reasonable, however its better if you get a professional to help you make that case.

In generaL: you have trades from back in the day that you didn’t account for, you should see an accountant. They will help you with everything from estimating your past gains and losses to amending past returns to dealing with the IRS.

Filing taxes for crypto as a trader without an accountant is like being your own lawyer in a divorce or rebuilding your engine based on YouTube videos. It might work out, I think you can technically do it, but it seems unnecessarily risky and like a ton of work.

Tim on

“There are loopholes in the new tax bill that let high frequency traders use a passthrough to benefit (essentially you would create an LLC for your trading). You have to be trading a good amount (in terms of volume and USD values) for this to work. See a professional for advice if you think this applies to you.”

Can you expand on that a little more? An IRS link for example? I do have a trading app which will execute many trades and I’m interested in the tax implications. Ideally I would like the app to be able to trade in an out of any cryptocurrencies…

Thanks!

Thomas DeMichele
Thomas DeMichele on

I will write an article on it, in the meantime it is the sort of thing you would want to run by an accountant and get their advice on.

alex on

Thanks for the article. Very useful.
Any idea how forked coins would be calculated though?
Let’s say I get bitcoin gold worth $300 at the time of the fork. Would that count as a $300 gift that would be taxable? Or is there no tax event until I sell (in which case, would the cost basis be $0?)?

Regards

Thomas DeMichele
Thomas DeMichele on

Glad you asked. I was trying to keep it short, but that is important:

So, it is my understanding based on my research (although I’m going to run this by my accountant and I suggest you do as well):

Your cost basis on Bitcoin Gold (BTG) is zero. Your profit is the full amount of your first trade from BTG to another crypto or fiat.

So it is $300 profit the second it changes forms (assuming it is traded when its fair market value in USD is $300; for example if you traded it on Bittrex for $300 worth of Etherum).

It is not a gift, it is like Bitcoin broke off a self similar part of itself (I really hope it isn’t considered as a dividend, not sure how that would work as there is no fair market value at the time of the fork really as the forked coin won’t have a stable price on the exchanges).

Now with that said, I do wonder if you could trade it back to Bitcoin and make the case that “it really was in like-kind to Bitcoin.” If anything is like-kind, it is a fork from the main chain. Literally uses the same code with a few tweaks.

Here again though, this is something we want a CPA to help us with. We don’t want to be our own criminal lawyers in a trial, we don’t want to be our own family lawyers in a divorce, we don’t want to be telling the IRS that we think Bitcoin Gold is so similar to Bitcoin we shouldn’t be taxed on it when we convert it back without the help of a professional either. 🙂

So, when in doubt, the cost basis is zero and the rest is profit with forks. However, see a professional so you know what the best way to file for you personally is. One could clearly make cases either way on the surface, but we will leave it up to experts to deal with the nitty gritty of the tax code.

Mark on

If I put $200 into Bitcoin a few weeks ago, lost a little, then used it to buy Ripple, where does that leave me at this point?

If I used the $30 profit I made on Ethereum and bought TRON with the $30 worth of Ethereum, where does THAT leave me?

Thomas DeMichele
Thomas DeMichele on

If you are playing with small amounts of money like that, you potentially will owe nothing. It depends on your income. You still have to account for your crypto though.

To your question [answer has been updated]:

You realize a loss when you converted Bitcoin to Ripple.

Then you realized a $30 gain when you traded Ether to Tron.

You subtract your loss from your gain and any profit left over is the taxable amount.

Two taxable events, and then you tally up all your capital gains and losses to figure out your total gains or losses.

Feel free to ask a follow up.

Rock on

What I am trying to figure out is that you are saying we have to pay taxes on capital gains if we profit. But does this apply if we haven’t cashed out?

If I where to make a profit of $20K am I expected to pay taxes for those gains even if I dont have that money in my bank account and its still in crypto coins on an exchange?

Thomas DeMichele
Thomas DeMichele on

Yes, if you trade crypto to crypto in GDAX, Bittrex, or Kraken (for example) then each trade is a taxable event. You are realizing capital gains and losses with each trade, thus you have to account for that and pay taxes of profits.

Like-kind property exchange might present a work around for 2017, but moving forward that has been taken off the table… of course, things could change, but that is where we stand right now.

Stratton Moore on

Thank you for the informative article. I just have a quick question:

What form do I need to use to report a loss when I sold my LTC to fiat?

Basically I just bought Litecoin with USD then rode the train and ended up selling – the remainder is just in my ‘USD’ Wallet on Coinbase. Lost about $100 but that’s how it goes sometimes! Thanks for the help.

Thomas DeMichele
Thomas DeMichele on

You would account for it here: https://www.irs.gov/pub/irs-pdf/f8949.pdf

You can carry forward your capital losses, so it is probably worth accounting for.

Essentially I say “if you traded crypto, see an accountant.” That could mean “go to HR and block and tell them about your capital loss” or it could mean “sit down with a local CPA.”

However, if you didn’t make $1k in gains, you generally have a lot of wiggle room and can consider filing your own taxes (as there isn’t much to muck up). Meanwhile, if you traded over $20k in crypto, have a lot of crypto holdings, or made over $1k in gains, then you would be wise to see an accountant (as there is a lot to muck up).

Carey on

How is buying TRON not a taxable event? I thought trading one coin for another is always taxed.

Thomas DeMichele
Thomas DeMichele on

What you say is correct. I phrased the answer incorrectly, can’t really figure out why.

In fact, it was so confusing I re-edited it.

It should have read and now reads:

“You realize a loss when you converted Bitcoin to Ripple.

Then you realized a $30 gain when you traded Ether to Tron.

You subtract your loss from your gain and any profit left over is the taxable amount.

Two taxable events, and then you tally up all your capital gains and losses to figure out your total gains or losses.”

Hope that clarifies things.

Richard on

Hey Thomas, I’ve made a total of 21 trades as of the end of 2017, and i think it was around 900 dollars total. I exported the transaction logs from coinbase and binance to cointracking.info and calculated my gains and losses. Is it sufficient to bring that to a regular tax accountant and they will understand how to input that into my taxes?

Thomas DeMichele
Thomas DeMichele on

That should be just fine. You would want to ask them directly, but you have it right. You want to (if you didn’t keep your own records) print out the best available records and plop them down on your accountants desk (or email them to them).

Then let them give you direction from there.

Richard on

What information do i need to bring to the tax accountant if i am holding crypto lets say on Binance or in a wallet? Binance is chinese market so would i have to fill out a FBAR? not quite sure what the procedure would be on that.

Thomas DeMichele
Thomas DeMichele on

Great question, I would gather your record of transactions first and foremost. That is the main thing they will need.

I don’t know if a FBAR applies honestly. The accountant will. I’ll ask next time I can talk to my accountant and update with the info.

Here is some basic guidance on FBAR and crypto:

https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar
https://www.goldinglawyers.com/fbar-bitcoin-2017-2018-important-cryptocurrency-reporting-tips/

And this one covers FBAR, FATCA, PFIC, and offshore disclosures (essentially the basket of anything that could apply to foreign entities in terms of assets and currency):
https://www.goldinglawyers.com/do-i-report-bitcoin-on-an-fbar-or-fatca-form-8938/

Simon on

So say I invested $3000 in Litecoin and it dropped to $2000. I then transfer $1000 of the remaining $2000 of Litecoin to a different Exchange. How do I report the capital loss since I only transferred a portion of the remaining Litecoin. Do I still report the entire $1000 loss or…?

Thomas DeMichele
Thomas DeMichele on

Transferring from wallet-to-wallet is not a taxable event. So it doesn’t matter. It isn’t taxable until you trade it for a different crypto or dollars (or use it to purchase goods or services).

Simon on

Thanks for the response. So if I take the $1000 Litecoin I transferred wallet-to-wallet and use it to buy Bitcoin and then use the Bitcoin to buy Tronix; I will have to report losses and gains, correct? Although in my case it’d just be losses since I didn’t have any gain.

Thomas DeMichele
Thomas DeMichele on

So in general you should report any capital gains or losses you had in a year. When you trade crypto to crypto you realize gains and losses. Thus if you lost money swapping around $1k between LTC, BTC, and TRX, then yeah you should report it. You can carry forward your losses, so if you have capital gains the next year you can offset them. Only $3k can be carried over to each year, but you can carry them through as many years as you need.

So if you lose $30k, you can carry $3k a year for 10 years.

Tex on

So say you see a minimal gain of about $1200 on small $600 deposit in BTC (yr2017) & didn’t cash out.

Then sent funds (in yr 2018) to an exchange to buy BTC in order to buy an alt coin.

Then deposited same way wallet-exchange-BTC-ALT coin a couple more times to purchase additional alt coins.

1. Are any taxes due for 2017?
2. What events would be taxable for 2017 & 2018?
3. How would one determine taxable amount of crypto to crypto transaction. Would folks have to know going rate for each coin at the time?

Bit of a noob, not sure where one gets that info. Especially if rate has likely changed since.

-Thanks in advance

Thomas DeMichele
Thomas DeMichele on

The second you change your BTC to any other coin, it is a realization event (you realize capital gains and losses). It doesn’t matter if you go from BTC, to an alt, then back to BTC… in fact, this is the exact sort of thing being taxed.

The only way around it for past years was claiming like-kind exchange. 2018 forward like-kind seems to be off the table according to the new rules.

So:

1. Tally up all your gains and losses, and you owe taxes on the profits at the marginal tax rate on dollars based on the brackets for the capital gains tax based on your income.
2. All selling, trading, and usage events are taxable.
3. The dollar value of the transaction is calculated at fair market value on the exchange you are using at the time of the event (if you didn’t record this, then you have to use best estimates). If you buy $300 worth of Bitcoin using litecoin, then the fair market value is $300 USD. Profit is capital gains weighted against capital losses in a tax year weighted against your cost basis.

This can all be a bit of nightmare to figure out, but the end result is that you are only paying taxes on profits.

Unfortunately this is all so complex that anyone who did any significant amount of trading really needs to see a tax professional. I can’t see that move not providing value to substantially all crypto traders who moved over $20k or made over $1k in profits… but honestly, even if you made less it isn’t a bad move.

Rock on

If you pay taxes on gains, even if you dont cash out, do you get taxed again also at cashing out?

You said earlier that if I gift crypto there is a tax? that sounds absurd. thats like saying if I give my friend $50 bucks I have to give uncle sam a tax cut of that. And who exactly gets taxed, the receiver or the sender? both?

What if I didnt give any but instead lost coins by sending them to the wrong wallet? What happens then?

Thomas DeMichele
Thomas DeMichele on

1. No, you only get taxed on profits. Once you have accounted for the dollar value you have now, you have accounted for it. When you cash out its a realization event, and you pay taxes on profits. If you don’t have profits because you already realized gains by trading, then you can just cash out without an additional tax burden. Taxable events don’t mean you pay taxes, they just mean you realize gains and losses and thus tally them toward your total profit or loss.

2. I am not sure why I wrote that giving a gift is a taxable event. When you give a gift you give them the same cost basis you paid. So if you give 1BTC you bought for $10, and then they cash it out for $10k, they owe taxes on $9.99k, but you owe nothing. There are no additional taxes for gifts unless you gift over the allowed amount (over $14,000 in USD value; not calculated from cost basis, but from current value in USD at the time the gift is given). https://turbotax.intuit.com/tax-tips/estates/the-gift-tax/L1sFpFeXV. If you give your friend $50, no big deal. If you give your friend $50k, Uncle Sam wants a cut. Same deal if its $50 worth of BTC or $50k.

3. If you lost coins there is a series of things you have to do like report the loss and file the proper forms. If you lost a bunch of money call a lawyer and/or accountant immediately. I’m not sure the exact right steps, but clearly seeking professional guidance ASAP is the right first step. You can’t just be like “oops, I lost it.”

Lee on

Question – If I trade from BTC into an altcoin like Verge, make 300 dollars, then sell back into BTC, I understand I have a $300 dollar gain I need to pay taxes on. Say Bitcoin is trading at $12,000 at the time of the Verge sale back into BTC. If I wanted to wait a week before I cash out of BTC into USD and the price of BTC is now at $12,500, I assume I also need to pay tax on the additional $500 that was earned during the waiting period?

Thanks.

Thomas DeMichele
Thomas DeMichele on

Exactly right. Then if you lose money on a capital investment in the tax year you can write that loss off against that gain. Or if you make more gains you add it to that.

Mike Habib, EA on

Great blog. As a tax advisor myself, I am getting a lot of these inquiries and I am glad that you have made such a valuable post public for may crypto traders to understand the tax obligations.

JR on

So if I bought some btc in Nov ’17 and did some trading with different coins and haven’t sold anything back to usd, I should probably track all my trades and probably have professional fill the appropriate forms for taxes?

Thanks

Thomas DeMichele
Thomas DeMichele on

100% correct.

George on

Hi, thanks for the information.

On your last comment about the warning. How is the final trade value determined when you’re trading crypto to crypto -is it fixed or adjustable with the market?
EG: Say you have 1 Ether traded for 500 Ripple coins, and Ether is worth 1000$ at that point, are you taxed for a thousand dollars at that point of transaction? But say that the price of Ether goes down to $500, and you haven’t made any trades with your Ripple coin, does your tax remain at 1000$ even though your Ripple coins are worth half of what they were? Or is there a way to account for the drop in Ether price retrospectively?

And say you did this multiple times, you traded Ripple for Ether when Ripple is worth more Ether, then trade Ether for Ripple when Ether is worth more Ripples. So you gain Ether overtime -and say the average price of Ether during your trades were a 1,000$ -so you’re taxed 1,000$ for each transaction, and on paper you’re making money because your have more Ether valued at 1,000$, but then the price of Ether takes a nose dive to 100$. Will you still be taxed on all your past transactions at 1,000$ even though your ether is only worth 1/10nth of what you were trading for now? Is there any work around for this, if that’s the case?

Also, second some what related question. If you’re trading for Ether to Ripple, aren’t you generally trading at an equivalent price? So if I have 1 Ether worth 1000$, I’m going to get Ripples equal to that amount, no more no less. So say Ripple is worth 2$ at the time I buy, then I’ll get 500 Ripple coins. So I don’t make any gains, so is that to be taxed, and at what rate? Would your 1000$ be taxed in it’s entirety? Even though you don’t make any gains?
Or is it that if you trade Ether for more Ripples, that you get taxed? Like say you have the above example, and now have 500 ripples, the price of Ripple doubles while the price of Ether remains the same. Then you trade your 500 Ripples for 2 Ethers, and so make a net profit of 1000$ -is that what you get taxed on?

Thanks.

Thomas DeMichele
Thomas DeMichele on

That is a lot to take in, but let me try to answer some of those questions:

1. When you trade out of a coin it is effectively the same as selling for dollars and then quickly buying the new coin with those dollars. So whatever your profit or loss at the time of the trade is is what is counted at the time of the trade, and what you trade into only matters for when you trade out of it.

What can really burn people, is what you describe. You sell $1k Ether for $3.50 XRP in December and it turns out that Ether goes to $1.4k and XRP to $1.25 by January. In this case you have what would feel like a loss to any rational human being, but in terms of the tax code what you have his your profit from Ether last year and a loss on-paper from XRP this year (you don’t realize the profit/loss from XRP until you sell). You can’t write off losses against each other over years (aside from the $3k worth of losses you can carry over to each year).

2. In the second part of your question: Every time you trade in and out of Ether and Ripple you have to tally gains and losses at that point. If you did all smart trades, then sat on Ether when it went down to $100, but didn’t trade out, then that losses is still on paper and hasn’t been counted (you haven’t realized the profit/loss as no taxable event has occurred, you’ve been holding). You have to realize the loss for it to be counted. If you did your trading in one year, but then sat on the loss into the next year… yep, that is another thing that can burn traders.

NOTE: This is why margin trading is so risky… it magnifies this whole deal. You can end up liquidated in January after having made back last year. In this case you would owe taxes on last years profits, but be out of money this year. Take a moment to read this story, and realize that the guy made millions last year and lost it this January. His tax bill could very well be un-payable, he will potentially be making payments to the IRS for years due to making good trades last year and bad trades the next. Something like this can ruin your life. It is an extreme example of what we are discussing here: https://www.reddit.com/r/BitcoinMarkets/comments/7s8umm/how_i_lost_nearly_200_btc_trading_this_past_month/

3. For the last part of your question: When you trade $1k worth of Ether for $1k worth of XRP you realize $1k (as you essentially sold Ether and bought XRP, you can think of that as the sale part being taxable and the buying part not being taxable until the next taxable event… to be clear, that isn’t literally how the tax code works, but you can think of it like that if it helps). In this respect it doesn’t matter what you traded into, only the value of what you traded out of matters for the realization event. That said, if you traded $1k worth of Ether for $500 worth of XRP (because you made a bad trade for some reason), then you sold that XRP or traded it for $500 worth of another coin, then in that respect it matters what the dollar value of the coin you traded into is. That value matters when you make your next trade, not at the time of the initial trade.

Bottom line here is: When you trade its like selling at the market value of the coin you are trading out of and buying the market value of the coin you are going into. If you realize losses or profits on trading gout of a coin (trading away for example the Ether at $1k), then you owe taxes at the end of the year based on that (it doesn’t matter what coins you hold into the next year for those purposes). If you are unlucky enough to make a bad trade that causes gains in one year and losses in the next…. ouch. It stinks that the answer is “ouch,” but at least knowing this we can avoid falling into traps like the guy in the above story who did the margin trading. This also helps us understand that while trading is fun and can be profitable, it can also end up being way worse than holding with taxes considered. Remember the long term capital gains tax is about 1/2 the short term. So long term holders pay less taxes, less often, and never have the opportunity to make a bad trade. Its hard to outperform them as a normal person. With all that considered, some way want to limit their trading to a portion of their portfolio and aim to build an average long position with the rest!

Feel free to ask follow ups or ask for clarification.

George on

Hi Thomas,

Thanks for taking the time to answer all my questions, really appreciate it. I made some follow up questions based on your answers. I just put each question under each of your response, since the context of the question is related to your response. It’s a lot, so hope you’re able to get through most of them. Thanks again.

Reply

Thomas DeMichele on January 28, 2018
That is a lot to take in, but let me try to answer some of those questions:
1. When you trade out of a coin it is effectively the same as selling for dollars and then quickly buying the new coin with those dollars. So whatever your profit or loss at the time of the trade is is what is counted at the time of the trade, and what you trade into only matters for when you trade out of it.

What can really burn people, is what you describe. You sell $1k Ether for $3.50 XRP in December and it turns out that Ether goes to $1.4k and XRP to $1.25 by January. In this case you have what would feel like a loss to any rational human being, but in terms of the tax code what you have his your profit from Ether last year and a loss on-paper from XRP this year (you don’t realize the profit/loss from XRP until you sell). You can’t write off losses against each other over years (aside from the $3k worth of losses you can carry over to each year).

Question: So is it that if Ether and XRP goes up the same amount, and you buy out then you don’t realize a profit so you don’t get taxed? Say in the above example you sell Ether at 1k for XRP at 3.50, then they both double to 2k and 7$ respectively, and you sell at that point. Would it be that you don’t make profit and so don’t have taxes? Or how do you actually calculate if you’re making a profit or a loss?

2. In the second part of your question: Every time you trade in and out of Ether and Ripple you have to tally gains and losses at that point. If you did all smart trades, then sat on Ether when it went down to $100, but didn’t trade out, then that losses is still on paper and hasn’t been counted (you haven’t realized the profit/loss as no taxable event has occurred, you’ve been holding). You have to realize the loss for it to be counted. If you did your trading in one year, but then sat on the loss into the next year… yep, that is another thing that can burn traders.

Question:
So is it that each year the cycle/ the number that is being compared to when you sell out resets? IE: say in your above example, XRP was 3.50 at 2016, then drops to 1.25$ the next year in 2017. And later in 2017 you decide to sell out at 1.25$, would it be then that the IRS will look at your trade and say you didn’t make a loss, but broke even since the 2017 high price is 1.25$. As to say you sold in 2016, would the IRS then say the high price was 3.50$, and you sold at 1.25$, so you did make a loss for that year? If that’s the case, would it be smart to sell with a loss, even if it’s significant, so you can have a tax write off for the next few years?

Also, conversely. Say you bought Ether at 1k$ November of this years, then it Jumps to 3k$ by December, would it be smart to hold off on selling it till January, so that way the price will be taxed at 3k$, so you technically don’t realize a gain?

Also, in terms of the wash rule. If you made a loss at november, would you have to sit on it throughout December to realize the loss? Or what happens if you realize a loss on December 30th, would you not realize the loss because 30 days didn’t pass?
Also, could you in theory, make a trade at 1000$, then lose 500$ and sell at that point. Then put in new money to buy the same stock/coin and make a gain and still claim a loss while making a profit on your second trade? So the question I guess is, does the wash rule only apply to reinvesting money you already have into the market, but gets reset in a sense if you add in more money? Or does it not matter?

NOTE: This is why margin trading is so risky… it magnifies this whole deal. You can end up liquidated in January after having made back last year. In this case you would owe taxes on last years profits, but be out of money this year. Take a moment to read this story, and realize that the guy made millions last year and lost it this January. His tax bill could very well be un-payable, he will potentially be making payments to the IRS for years due to making good trades last year and bad trades the next. Something like this can ruin your life. It is an extreme example of what we are discussing here: //www.reddit.com/r/BitcoinMarkets/comments/7s8umm/how_i_lost_nearly_200_btc_trading_this_past_month/
3. For the last part of your question: When you trade $1k worth of Ether for $1k worth of XRP you realize $1k (as you essentially sold Ether and bought XRP, you can think of that as the sale part being taxable and the buying part not being taxable until the next taxable event… to be clear, that isn’t literally how the tax code works, but you can think of it like that if it helps). In this respect it doesn’t matter what you traded into, only the value of what you traded out of matters for the realization event. That said, if you traded $1k worth of Ether for $500 worth of XRP (because you made a bad trade for some reason), then you sold that XRP or traded it for $500 worth of another coin, then in that respect it matters what the dollar value of the coin you traded into is. That value matters when you make your next trade, not at the time of the initial trade.

Question: So you don’t get taxed on the initial buy in to another currency? Only when you sell from your current position into another one? Also, is it that regardless of whether you make a profit or not when you sell, you’re getting taxed on that sell? So if you bought XRP for 1k$ with Ether, then sold the XRP back to Ether for the same price at 1k, would you get taxed on that transaction even though you didn’t make any money?

Bottom line here is: When you trade its like selling at the market value of the coin you are trading out of and buying the market value of the coin you are going into. If you realize losses or profits on trading gout of a coin (trading away for example the Ether at $1k), then you owe taxes at the end of the year based on that (it doesn’t matter what coins you hold into the next year for those purposes). If you are unlucky enough to make a bad trade that causes gains in one year and losses in the next…. ouch. It stinks that the answer is “ouch,” but at least knowing this we can avoid falling into traps like the guy in the above story who did the margin trading. This also helps us understand that while trading is fun and can be profitable, it can also end up being way worse than holding with taxes considered. Remember the long term capital gains tax is about 1/2 the short term. So long term holders pay less taxes, less often, and never have the opportunity to make a bad trade. Its hard to outperform them as a normal person. With all that considered, some way want to limit their trading to a portion of their portfolio and aim to build an average long position with the rest!
Feel free to ask follow ups or ask for clarification.

Question:
All things considered, can this problem be largely avoided if you just trade USD to some crypto currency, like you can with GDAX? Since then you either have money, or crypto? Rather than having Crypto and Crypto, where one of it can vary? Or is the problem primarily with when you trade -at what point of the year, or what year specially?

Thomas DeMichele
Thomas DeMichele on

Answer: It doesn’t matter what price XRP is when you buy it for calculating profit/loss at that time (it’ll matter when you trade out of XRP, not when you trade out of Ether). What matters is the price Ether is at when you trade out of it (so in your example $1k). The initial cost of XRP ($3.50) only matters when you then trade back out of XRP.

Answer: Your cost basis remains between years, but your profits and losses from sales, trades, and usage are calculated per tax year (which in the U.S. is also the calendar year). However, you can carry over up to $3k in losses each year from past years. If you buy XRP for $3.50 in 2017 and sell in 2018 for $1.25, then you lost $2.25 per XRP in 2018. In terms of the coin you are trading into, buying or trading into a coin is only significant in that your cost basis comes from the point you buy/trade into another coin.

Answer: It is easier to calculate USD but effectively it is the same thing. Every time you trade it is in many ways like you quickly sold to USD and then bought the new coin. So more to calculate with crypto to crypto, but essentially all the same problems. The only real perk of USD is that it is stable, it isn’t going to go down 80% in a month or up 400% in 3 months (if it does, we all have major problems). The guy in the story was margin trading, so he was essentially dealing with USD. His problem came from the fact that every margin trade is a short term profit/loss, so his profits were taxable last year… then he lost it all this year and thus has profits one year and deep losses the next. Only way around that happening to you is being responsible and not margin trading 100% of your capital + profits from one year the next year before tax time. At least those who made killer profits in 2017 and then bought at the top in 2018 are still sitting on coins that could rise in value. The margin trader was just liquidated.

John on

Hi Thomas – thank you for the excellent article.

I am attempting to put together a spreadsheet that I can use to track trades and mining, but there is a lot to take in with all of the tax information. I was wondering if you would offer your opinion on the following.

What I gather is that whenever you buy (or have income from mining) any cryptocurrency, you have a cost basis that is what you originally paid (or the equivalent amount for mining) minus any fees (is that correct?). When buying/mining, you’d want to track the date, type of currency, USD value, Fees, Basis (value – fees), how much of currency you bought, where it was purchased from, and possibly the BTC value on that date just to be safe. For a sale, you’d want to track basically the same information, however you also want to know the original cost basis of the currency so that you could calculate a gain/loss based on the current currency type value. For transfers, I’d assume just tracking date, soure, destination, and type of currency would work.

Assuming that is all correct, I have a big question regarding determining how you figure out the gain/loss due to not really knowing your cost basis if multiple buys have taken place at different USD values (also mining).

Here are two hypothetical situations to illustrate my confusion:

A) You can determine cost basis to use if no other income/buys have occurred in-between your original purchase and the sell event:

You buy 1 BTC for $1000 (cost basis). BTC is worth $1000.
You sell .5 BTC for $500 using $1000 cost basis. BTC is worth $1000.
You buy 1 LTC for that .5 BTC. LTC cost basis is $500.
1 BTC value drops to $500.
You sell .5 BTC for $250 (your .5 BTC cost basis is still based on the original $1000, so it is $500) making it a $500 basis – $250 value = -$250 loss
You buy 1 ZCL for .5 BTC. ZCL cost basis is $250.

That would give you BTC buys total: $1000, BTC sales of $500 (.5 BTC) and $250 (.5 BTC) which totals $750, giving you a loss of -$250 total.

B) But what happens if you purchase BTC in-between, like this:

Buy 1 BTC for $1000 (basis). BTC worth $1000.
Sell .5 BTC at $500 using $1000 basis. BTC worth $1000.
Buy 1 LTC at $500. LTC cost basis is $500.
1 BTC value drops to $500.
Buy 1 BTC at $500 (cost basis for this 1 BTC). BTC is worth $500.
Sell .5 BTC at $250 … What is the cost basis? You have 1.5 BTC total, but .5 is on a cost basis of $1000 and you just bought 1 at a basis of $500…
Buy 1 ZCL at $250. ZCL cost basis is $250.

Hopefully that makes sense. Please let me know if I am mistaken in either of those situations. I’m having trouble understanding how you can track the cost basis for the same currencies and then what to use later on when you sell them at different times… Especially when you take into consideration mining – you have a different cost basis everyday!

Thank you! 🙂

Thomas DeMichele
Thomas DeMichele on

You are generally correct in what you state (to the best of my knowledge).

To your point, in the second situation it really depends if you are going to calculate as First in First Out (FIFO) or Last in Last Out (LIFO).

If you do last in last out, which generally is the best way to do it if you are holding long term (as it ensures you aren’t realizing long term gains), then the last BTC you bought is the last BTC you sell (last in… last out). Since you bought 1 BTC when BTC was $500, then sold .5 BTC after that… that .5 BTC came out of the $500 BTC and thus it doesn’t have anything to do with the other BTC you bought at $1,000.

If you do First in First Out, and if that earlier purchase was say your first one, then you work through the older purchases first.

If it was somewhere in the middle, then you start getting into complexities. There are some other ways to calculate capital losses and gains in general (I have to find out if these work with investment property, but here: //www.investopedia.com/terms/a/averagecostbasismethod.asp).

Back to FIFO / LIFO. If you started investing when crypto was high, you might want to do FIFO. If you started when crypto was low, you almost certainly want to do LIFO.

All that said, I ALWAYS use an accountant. I have really just compiled and learned about this to help me make better choices throughout the year and to allow me to write about it. There is so many moving parts that I don’t feel comfortable braving this all myself, further, it just helps to have a professional double check your records and sign off on your strategy.

My accountant’s advice basically boiled down to this: Trade as if taxes weren’t a thing, and do your best to make money.

That isn’t to imply that you shouldn’t take taxes into account. You should, and it can save you some headaches. The point is just that, you shouldn’t pass up opportunities to buy low or sell high because you are worried about profit/loss, and you shouldn’t sell or buy more than you are comfortable with to try to offset taxes.

NOTE: To summarize and provide a clear answer to your lest point: your cost basis is recorded each time you obtain crypto in one of the ways discussed above. Then it is adjusted using FIFO or LIFO (or more generally a calculation method) when it is sold. You are thus adding to your cost basis every time you obtain, and then adjusting every time you sell (but how you adjust depends on the calculation method).

John on

Great, thank you for the reply Thomas!

I’m really just trying to figure out the best way of tracking it all in a spreadsheet. I’ve found the online offerings either difficult to use or finding odd calculations etc.

I’ve only recently gotten into crypto, and I believe it would be much easier if I were only buying and holding, but unfortunately I’m buying, selling, holding, and mining! When you add FIFO or LIFO to all of those, this becomes such a huge nightmare! Especially when you’re mining and selling almost daily to turn a profit on quick gains.

I appreciate your advice. If you find any amazing spreadsheets that make this stuff easier please let me know! 🙂 I’ve found a few and I’m using one on Google Docs now but it doesn’t really take into account cost basis etc.

Anyway, thanks again. 🙂

Thomas DeMichele
Thomas DeMichele on

Honestly, I fully agree with you and am in a similar situation (as are a large majority of crypto traders around the world; as other nations have similar requirements).

Accounting for all this is a nightmare and there isn’t really any good way to make it easy. All you can do is keep records, give them to your CPA (who should be aware of what you are doing so they can direct you to file quarterlies if needed), and then buy them a pizza and hope they don’t hand you back too big of a bill. 😀

John on

Yep that’s true! Luckily I have an awesome CPA (currently lol) so I’ll email him soon.

It’s honestly so frustrating that crypto has been around for quite a while now, but they still can’t really figure out how to make it at least somewhat straight-forward for taxpayers. I get that they want their share of the pie, and that’s fine with me, but at least give us a spreadsheet with how you want us to enter this stuff instead of some extremely generic one-liners and a terrible tax form lol.

Ah well. Good luck in the future with your trades and thanks again. 🙂

Thomas DeMichele
Thomas DeMichele on

Couldn’t agree with that more! I was very surprised when 2017 passed by with no further guidance considering how popular crypto trading became. It feels like a set-up for a fail as those without CPAs could be in for a real shock unless they are finding sites like ours and getting the scoop early. If someone owed me countless millions, I’d take great care facilitate their payment and make sure it was as easy as possible to pay the full amount on time.

George Foland on

Hi Thomas! Loved the article.

My Company, TaxToken, has developed an application that tracks all cryptocurrency gains and losses for US users. TaxToken recently placed second at the North American Bitcoin Conference in Miami. I would love to get in contact with you for a potential strategic partnership!

Cheers !

Thomas DeMichele
Thomas DeMichele on

Sounds good. We will review your project and get in touch.

Nick J on

I bought bitcoin during last week of Dec 2017 and exchanged them for XRP . As of now i am at no profit no gain .
Do i owe tax or have this information in any of the tax forms?

Thomas DeMichele
Thomas DeMichele on

If you have no gains, you don’t have to pay taxes or file. However, if you have losses you may want to file.

Its like if you bought a car for $20k and sold it for $10k, there is nothing to report. Yet if you bought it for $20k and sold it for $30k there would be.

https://turbotax.intuit.com/tax-tips/investments-and-taxes/guide-to-schedule-d-capital-gains-and-losses/L1bKWgPea

NOTE: That is generally speaking. The IRS may want a record of what cryptos you own, perhaps there is a future rule or rule I’m missing. In general, I would advise any crypto trader to at least contact a CPA.

Gene on

My story: I started buying cryptos on Jul 19th.

Jul 19th bought btc +0.00217349 +$5.99 at coinbase.
Jul 19th bought btc +0.04531806 +$107.99 at coinbase.
Aug 10th sent btc – 0.02975309 -$101.14 to bittrex. Deposit at bittrex was 0.02941600 btc.
Aug 14th sent btc – 0.01374398 -$59.85 to bittrex. Deposit at bittrex was 0.01308900.
Nov 6th bought btc +0.01604786 +$120.00 at coinbase.
Dec 19th sent btc – 0.00831905 -$148.90 to bittrex. Deposit at bittrex was 0.00700000.
Dec 23rd sent btc – 0.01154 +$180.11 to bittrex. Deposit at bittrex was 0.00928000.

I purchased 350 potcoins, 37 nexus coins, and 650 ripple coins on bittrex. This was all for 2017. I’m now at a stop for completing my taxes. My problem is that I do not know what the price for bitcoin was at the time of the transactions. I need to know if I have a loss or gain all together. Bittrex did not show anything. It would seem I did not make a profit for 2017. I will worry about 2018 when need be. Things may change by then. Can you help me?

Thomas DeMichele
Thomas DeMichele on

One way to do it if you didn’t keep your own records:

Find each date, and then figure out what the price of the currency was in USD. To do this find the value in BTC and then use this chart to find the value in USDT (that isn’t USD value, as Bittrex doesn’t deal in USD, so the reality is you then will need to check the USDT/USD conversion rate and adjust each number a bit; although since its almost always $1 it would still give you a pretty darn close estimate if you didn’t do that extra step… consult a professional on that one): https://bitinfocharts.com/markets/bittrex/btc-usdt-all.html

If you don’t use that chart, then at least use the same source for all your trades and it should generally return an acceptable profit/loss.

There isn’t a super simple way to do it, and annoyingly the dollar value of a coin can differ by exchange (so watch out using CoinMarketCap as they aggregate prices across exchanges including exchanges you couldn’t access where the price trades higher or lower).

The reality is exchanges have not made our lives easy and the IRS has not made our lives easy. It can help to keep records at every step (as you can imagine)… but as long as you use the same source in retrospect for all your calculations you should generally be getting something close to an accurate answer.

So simple is find the value in BTC, then find the value of BTC in USDT or USD at that date on the exchange you used, then calculate losses/profits from that. Then, to be extra on the nose, make sure to adjust USDT values for the actual value of USDT on the date.

If you do all the steps, you’ll get a 100% accurate count, if you skip the last step, you should get really close (which should be good enough if you didn’t do a ton of trading).

All that said, if the end result is that you owe a bunch of taxes, because you made a bunch of profits, stop what you are doing and call a CPA. Their fee is going to likely be worth it.

Speaking very loosely, see IRS rules for specifics: When you mess up on your taxes and end up owing more than you think you did, you owe a 4% fee on the extra amount charged. So if you are off by $100 because you messed up a bit, and the IRS wants to fiddle through the records and prove you wrong, then you’ll get a bill for $104. Not the end of the world. If you make a good faith effort to pay your taxes, and you use the methods above, you are very likely going to end up with an acceptable profit/loss.

Eugene Greiner on

So you said simply find the value of BTC in usd or usdt on the date of the transactions in the exchange used. How do I find the value of BTC on the dates of the transactions? I do not know how to do this. All my transactions for 2017, as I said above, were buying BTC at coinbase; then sending the BTC to Bittrex. Then buying potcoin,ripple, and nexus with that bitcoin. Which transactions are taxable, if there is a profit. Buying at coinbase, sending to Bittrex. or buying cryptos at bittrex? I would think that there would not be a profit doing these things, what do you think? Thanks in advance for your answers. I’m very confused and I do not think I need a cpa. I just need a way to do this.

Thomas DeMichele
Thomas DeMichele on

When you trade a coin for a coin, you owe taxes on the dollar value of the coin you trading out of (as its like selling it in a way).

You can find that dollar value by figuring out the value in a trading pair (so in BTC, in ETH, in USDT, in USD, etc).

If you don’t trade for USD, then you need to figure out the USD value of the other coin at the time.

To do this you need historic price data for the exchange you traded on.

So on Dec 1 at 1 pm I trade BTC for XRP on Bittrex. I then would figure out the dollar value of BTC at the time of the trade and use that dollar value to figure out my profit/loss. That dollar value would also be by cost basis for the XRP.

Does that make sense?

Eugene Greiner on

I heard about CoinTracking.info, would it be easier to just use that? What do you think? Have you heard of it?

Thomas DeMichele
Thomas DeMichele on

I haven’t personally used it myself, but certainty if you use software that helps you track your trades and calculate your profits and losses that could help.

Things to think about:

– Where are the pulling dollar values from, how they being calculated? Ideally you want to calculate based on the value you could get in USD via the exchange you were using, you don’t want data aggregated from across exchanges (including ones you couldn’t have possibly sold on).

– They use FIFO in their tax reporting, in the U.S. the rules seem to indicate that LIFO is an option. LIFO could be a better method for many.

– Everyone is probably ultimately going to have the final say in their reporting. Many exchanges will provide you with a breakdown of what they consider to be your trades and will have some data on amounts. However, if you trade enough, you or your accountant is going to end up wanting to go through and double check everything. So the same would probably end up happening even with a program that calculated everything perfectly.

Those points made, you don’t have much to lose from having more data, and a tool like that could potentially make life a lot easier. I’d have to do a review and actually use it and dig through exactly what it is doing to comment on it properly.

Dino Zuk on

I bought $3,000 worth of bitcoin in 2017 and sold it in 2018 for a small loss. Would this be reported in the next years tax return (2018) or this years (2017)?

Thomas DeMichele
Thomas DeMichele on

You are taxed in the year you sell (or trade or use) not in the year you buy. So 2018.

Although, I don’t see how you took at loss on $3k BTC if you didn’t do any other trades. It traded at double that even at its low point in 2018 so far.

rene on

the article states:

FIFO rules should be optional. You should be able to choose between “First in First Out” FIFO and “Last in Last Out” LIFO.

I think you meant “Last in First Out” for LIFO

warm regards,

rene

Thomas DeMichele
Thomas DeMichele on

Thanks for spotting that. You are right. The correction has been made.

MikeP on

I just got into Crypto Trading. 2018 Im only Trading with $400 (as of right now)
What advise can you give me for next years tax prep.
.
I also seen that there is a Bill that might pass for trades under $600 to be tax exempt. Do you think that has a chance to pass ?

Thomas DeMichele
Thomas DeMichele on

The bill called “The CryptoCurrency Tax Fairness Act” (the one that proposed exempting trades under $600) hasn’t passed in any form yet as far as I understand (see: https://govtrackinsider.com/cryptocurrency-tax-fairness-act-would-counter-an-irs-rule-that-may-have-hampered-bitcoin-ef7854cc28e0). I’ll keep an eye out for it.

Regardless of how much you trade you just want to make sure you are keeping a ledger. If you have $400 total, you shouldn’t need to do any quarterly reports and can just square up at tax time, but keeping a ledger will make that easier.

The best and only real advice I can give is to see a tax professional, but otherwise basics like keeping a ledger and filing taxes are best practices!

rich on

Hey Thomas, really appreciate the work you are doing here. I recently went to file my taxes. When i brought up that i am holding virtual currencies and want to file and have on record that i am holding and traded a little bit, they told me there’s no point in filing taxes. I was in the negative of just 11 dollars end of 2017 and i made like 20 trades only, but i didn’t want to be secretive about it and wanted to have it on record that i am not trying to evade any taxes(even though i wasn’t going to owe any because i was negative). is it fine that i continue on holding what i have now and just report in a few years when or if i cash out? They told me don’t file because it is a grey area and i had only small amount. should i go to another tax accountant? not really liking the idea of paying more money haha

Thomas DeMichele
Thomas DeMichele on

That is a great question. I actually don’t know the answer to this. I do know that if you don’t have to file taxes because you are under the tax filing limit, then you don’t have to report anything. I assume the rule applies to crypto as well.

I think you can follow your accountant’s advice on this one. It seems a little absurd to pay for another round of professional advice in the hopes of squaring up $11 worth of profit from crypto trading… and my next best answer would be “consult a tax professional”…which at this point feels redundant. 🙂

I’m going to research this one.

rich on

yeah i agree. Thanks for sharing all your knowledge =)

Thomas DeMichele
Thomas DeMichele on

You are welcome. I did the easy part, the hard part is deciphering your trading history on the exchanges and translating it to the proper forms. 😀

Daniel on

Hello Thomas,
I have a scenario or two for you. I bought some bitcoin on coinbase using my credit card. I then transferred a portion of the bitcoin from coinbase into gladiacoin (it was a company that advertised to double your bitcoin in 90 days). I got paid a very small portion of the bitcoin back to my coinbase wallet. The rest i never received and the company went out of business and shut operations. Another company called Walletpllus i put the bitcoin and they went under.

Based on these situations, How will I handle the tax reporting since i lost my bitcoin but I don’t have a record from them. All I have is my coinbase account showing the bitcoin going to another bitcoin address that i put a label of gladiacoin and walletpllus. Thanks for your help.

Thomas DeMichele
Thomas DeMichele on

1. As a general rule of thumb I stay away from all Bitcoin lending programs that promise big returns like that. Onecoin, Bitconnect, the ones you mention. There is a long history of people getting scammed. So let’s say fool me twice, no more Bitcoin lending schemes! Instead study TA and figure out bots.

2. You need to see a tax professional on this one. On one hand you need to account for profits and losses when you transferred to these services (you sent gladiacoin Bitcoin, that is a taxable event). On the other hand you can make the case that you had your money stolen and/or you made an investment which resulted in you taking capital losses. I would hope a tax professional could help you account for this. It goes outside of the scope of my knowledge, so I’d have to research this further to have any good answer for you. Good luck!

NOTE: Don’t feel bad about making a few bad moves on your journey. I won’t say everyone does it, but it is common. But really, really, there is no free and easy money in life. Take my advice and sink your time and energy into figuring out TA and bots. Don’t send your Bitcoins to some shade-ball on the internet who promises to do that for you (as that is what they claim they are doing to double your money)! If you can’t figure it out, revert to a simple time test strategy like dollar cost average, hold, and take incremental profits.

Joe on

What method should I use for computing a Maximum Crypto account Value on FBAR?

How would you know what is the highest amount from an Exchange to report on FBAR if more then ten thousands? If the amount goes up and down during the day? How to calculate that?

Thomas DeMichele
Thomas DeMichele on

First and foremost, is a question for a tax professional.

With that said, taking this direction at face value “The maximum value of an account is a reasonable approximation of the greatest value of currency or nonmonetary assets in the account during the calendar year. Periodic account statements may be relied on to determine the maximum value of the account, provided that the statements fairly reflect the maximum account value during the calendar year.”

I would say, you pick the day that you think your account balance is the highest, and then do an estimate what the highest dollar value was on that day (and that that logically would be the Maximum Value). That seems like it is easier to figure out the less coins you have, but for many of us that day would be somewhere in December.

All that said, my first response is the right one, I’m not 100% sure on this, so you would want to see a professional or revert to official instructions and documentation.

https://www.fincen.gov/reporting-maximum-account-value

Martin on

Hello, I haven’t seen this answered elsewhere, so here I go.

I live in Argentina and will be moving to the US soon. How should i treat all the cryptocurrency I own from before i move to the US (I only have small altcoins)? Some were mined before they had any value as they were not listed in any exchange, some were received as gifts and others from airdrops and giveaways.

Thanks in advance

Thomas DeMichele
Thomas DeMichele on

I believe you would just figure out your cost basis and then pay taxes on the sale of them when you trade or sell as a U.S. citizen and/or tax payer. That is what comes to mind in terms of logic, you should check that logic with a professional (like a CPA) or official IRS guidelines before acting on it 🙂

tru on

I’m struggling with what you’re talking about regarding mining. What I’m reading says that mined coins are income, therefore the cost basis would be $0 and the price of the coin when mined would be entirely taxable as income. If you then sell that coin at a gain/loss, there would be tax implications for that event as well. Curious to get your thoughts on this.

Thomas DeMichele
Thomas DeMichele on

I have to double check the exact rules for mining, but I’m under the impression that 1. it is income and 2. you then adjust for profit losses when you sell, trade, or use it. Essentially, I believe what you say to be correct. It is explained a bit in that IRS document from 2014. I haven’t re-read it recently to double check that.

QforU on

US Taxes Q. Let’s say I want to do them correctly for 2017, but have been involved in Bitcoin since 2012 and never reported..Never cashed to Fiat except for 2017. What to do?

2012- Bought Bitcoin

2013- Mined Bitcoin/LTC/ bet on Sports

2016 – Bought Eth/BTC/etc 2017 – Lots of coin for coin trading

Let’s say I use one of the great services like Bitcoin.tax to do all my 2017 transactions… Won’t that essentially alert the IRS that I may not have been reporting properly in previous years? It was truly the wild west back then and I was a teenager so it truly didn’t seem necessary.

Now could I conceivably claim it all in 2017 as short-term capital gains at the highest percent to recover?

Looking for any guidance.

Thomas DeMichele
Thomas DeMichele on

I think the standard advice here is that you should catch up with what you owe sooner rather than later and file an amended return (https://www.irs.gov/pub/irs-pdf/f1040x.pdf).

https://www.irs.gov/newsroom/irs-offers-tips-on-how-to-amend-your-tax-return (this page is slightly outdated, but it’ll give you the gist).

You may be able to, with the help of tax professional, get out of some of this without owing fees since you never went to fiat (perhaps treating all trades as like-kind, paying back taxes on mining income, paying back taxes on usage, and meanwhile claiming long term capital gains at the lower rate when you can).

Honestly it is a complex situation. You should see a CPA and have them help you. All I know is that when you owe back taxes you also owe fees, and thus the sooner you take care of it the better. This is especially true now that crypto is in the public eye.

Another option on the table is to call the IRS… but I feel like the first step for you logically has to be to see a tax professional. If you kept any substantial amount of crypto the benefits of paying a professional are going to outweigh the costs.

Good luck!

Ps. Bitcoin.tax is from what I know third party software. The IRS would likely have to subpoena them to get the info. I don’t see that happening. That said, you are generally better off seeking them out then having them seek you out. So how they find you will ideally be that you contact them with the assistance of a tax professional (I know multiple people who had to amend returns and pay back taxes, it is a painless process if you initiate it… minus the obvious owing back taxes and fees part).

Dan on

Hi
I have only been in crypto since mid-2017. I reported all my 2017 coin to coin trades and coin sales (used bitcoin tax with appropriate forms and my CPA). So I have paid any taxes owed for my gains this year. If I now decide to sell what I still hold, by either selling directly for usd (for BTC and LTC) and then also converting my other alt-coins back to BTC and selling to usd. What will I again pay tax on? Just slightly confused on this part. Thanks.

Thomas DeMichele
Thomas DeMichele on

Essentially you take the profit / loss from last year and that is your starting point, if you then saw additional gains or losses in 2018 from that point, you have to report and pay the appropriate taxes.

You very likely have either losses or profits in 2018, so you’ll need to report that when tax filing time rolls around again (or if you made substantial gains, via a quarterly).

In short, selling in 2018 means needing to account for the difference between 2017 and 2018 when you file.

You won’t be double taxed though.

So if you Bought BTC for $8.5k last year, and sold BTC at $15k later that year, and bought back at any point, and then sold this year at $8.5k, you have losses. You don’t owe taxes on losses, but you should account for them (as they can be written off against other capital gains this year or in the future up to the annual limit for carrying over losses). Now let’s say you somehow have a profit form 2017 to 2018, for example you sold LTC at $100 last year for a profit and bought back at $105 and sold at $145 this year. Now you have gains in 2018, $105 to $45, a $40 gain per LTC for 2018.

That is the gist. Let me know if you need more clarity.

richard on

Hello Thomas,

Thank you for always being there to spread knowledge. Regarding the SEC’s new ruling, saying that bitcoin and ether isn’t a securities, that they are regarded as commodities like gold and oil, what does that mean for tax now? i assume that is a whole different realm?

Thomas DeMichele
Thomas DeMichele on

They have always been investment property to the IRS. There was a chance the SEC was going to convolute that by treating coins that originated as ICOs as securities, but it looks like at least Ethereum won’t be treated as such. It is likely that existing coins like EOS, TRON, Ripple, etc won’t be either… but honestly he did not say that specifically. What he did say is that some, not all, ICOs are securities. This is still a little murky because so many coins started life as ICOs like Ether did. So still hard to say for sure what is up.

For the ICOs that are securities, it may be the case that they get different tax treatment. I am very sure this will be covered when final rules are made. I’ll update as we know more. For now the above tax rules still apply to all cryptos (as it was assumed none were securities to start).

Chris Cook England on

I have 76000 usd in my bitcoin wallet, from an investment of an initial £14250, how does the Company I am using withdraw this money to me after I pay another £8000 in us taxes.

Thomas DeMichele
Thomas DeMichele on

You get 100% of YOUR money from the company that is holding it (let’s assume “the company” is a major exchange like Coinbase or Binance).

Then you calculate your own taxes and pay the tax man what you owe at the appropriate time (the specifics are different in the UK then they are in the US).

In general if you made that much in profits, then you’ll likely want some professional assistance filing.

William Daniel on

Is there a minimum amount you’ve made off cryptocurrency that doesn’t have to be reported?

Thomas DeMichele
Thomas DeMichele on

Yes, if you are exempt from reporting taxes, then you don’t have to report crypto. Also you don’t owe taxes if you make under a certain amount. I don’t have the exact rules on hand and the amounts change each year. But look at exemptions for reporting on income and capital gains from the IRS. I’l compile this info when I get the chance.