What you should know:
With crypto’s rise in popularity over the past few years, they’ve caused quite a headache for traders and their accountants alike.
2018 saw the biggest change in the relationship between taxes and cryptocurrencies, with the IRS beginning to crack down on over 13,000 Coinbase accounts who transacted over $20,000 worth of digital currencies from 2013 to 2015.
What many traders found frustrating about this process is how suddenly they owed capital gains tax on transactions, with many finding it unfair that they have to essentially pay taxes on an asset they might not even own anymore. Granted, it was those who were putting forth the biggest risk by trading high-volume in uncharted territory that took the most significant hit; however, that’s not to say others who dabbled into cryptocurrencies didn’t see the effects as well.
As noted by Cointelegraph, approximately 36.5 million Americans have owned some sort of cryptocurrency at one point, which goes to show this is a pretty universal concern…and if you’ve found yourself wondering what to do about any crypto you own, we’ve got a few guidelines for what 2020 has in store:
How Does The IRS View Cryptocurrencies?
The IRS doesn’t exactly view cryptocurrencies as a ‘currency’. According to Coinbase, the IRS taxes cryptocurrencies because they’re viewed as property. Essentially, think of this as any other asset, including if you were to sell a house, car, or any other piece of property.
What Actions Get Taxed?
With the IRS viewing cryptocurrencies as property, any transaction involving that property could be liable to taxation. Falling under capital gains tax, this can get tricky.
As noted by Intuit, capital gains tax hold a fair amount of nuances to them, including how long the asset was held, what was actualized as a profit or loss, and even how the asset got to you (for example, those who ‘mine’ Bitcoin have to report it as income, as well as those who get paid via cryptocurrency). To make things simple, the team over at Coinbase compiled a list of common transactions where crypto is taxed. Here’s what they’re saying:
- Paying for a good or service
- Selling cryptocurrencies
- Buying one cryptocurrency with another
- Being paid in cryptocurrencies
- Being rewarded in cryptocurrencies
As a pretty straightforward list of transactions, we’ll also note that losses can affect your taxes as well, giving you a balance if you’re a high-volume trader. Consult with a tax expert on how to reconcile your crypto books with the rest of your finances.
Essentially, think of this as any other asset, including if you were to sell a house, car, or any other piece of property.
What You Should Do If You’re An Active Trader
The most simple thing you should do if you’re an active trader is what you’d do with many other assets: HODL (or, hold for those unfamiliar with crypto-slang).
While it’s considered sound advice in the cryptocurrency community regardless, this is particularly true if you’re trying to avoid hefty taxes for constantly withdrawing your money. Although not as expensive as other assets that are subject to capital gains tax, a smart way to think about cryptocurrencies when it comes to taxes is how the transaction of a house or car would work.
Finally, if you’re worried about how to handle the taxes for your cryptocurrencies, don’t hesitate to reach out to us for a free consultation at hello@hollowaycpas.com