bitcoin tax losses

2018 was a bruising year for bitcoin with the cryptocurrency falling 72%. A lot of traders and investors are in the red and may have sold their bitcoin at a loss. If that sounds like a familiar story, there is a small silver lining: bitcoin losses are tax deductible. You can claim bitcoin losses on tax under certain circumstances.

CreditKarma recently reported that American investors lost $1.7 billion by selling bitcoin last year. But only half plan to report those losses to the tax man.

Many Americans may not realize they could save money by deducting their bitcoin losses. More than that, failing to report those losses “could lead to an audit and having to pay penalties and interest” according to CreditKarma.

So, let’s run through everything you need to know about reporting bitcoin losses.

Note: this bitcoin tax guide is written for US taxpayers. For those in other jurisdictions, please contact a tax expert in your area.

Do you have to report bitcoin on taxes?

First, let’s go back to the beginning: bitcoin is subject to tax. Not a lot of people realize this, as evidenced by the fact that only 800 taxpayers per year stated their bitcoin gains between 2013 to 2015.

So, yes, you do have to report bitcoin gains and losses on your tax files.

How is bitcoin taxed?

The Internal Revenue Service (IRS) taxes bitcoin in the same way as property. So you pay tax on gains and losses, like you would for real estate, stocks, or bonds.

It’s a confusing system considering bitcoin is a form of currency, but that’s how it works.

Firstly, tax only comes into play if you’ve realized a gain or loss. In other words, if you’ve sold, traded, or spent your bitcoin.

For example, if you bought bitcoin at $100 and sold it at $1,000, you owe tax on the $900 gain.

But if you’re a die-hard hodler who bought bitcoin and never sold it, you can leave this page. There’s no tax for you until you sell it.

The tricky (and ridiculous) thing about this system is that you owe tax if you spend bitcoin. Even if you buy a coffee with bitcoin, you need to record that transaction and figure out if there was a loss or gain.

Note: There are software platforms that will track your trades and spending to figure this all out for you. 

How much tax do you pay on bitcoin?

That depends on your tax bracket and how long you’ve held the cryptocurrency.

Bitcoin is subject to short-term and long-term capital gains.

Short-term gains – if you’ve held bitcoin for less than a year at the time of selling, the tax falls under ordinary income, in your particular income bracket.

Long-term gains – if you’ve held bitcoin for longer than a year, it falls under the long-term capital gains rate. It’s a lower tax rate, but still dependent on your income bracket.

By the way, we went deep into the topic of bitcoin taxes in this article if you’d like more information. 

Bitcoin losses are tax deductible

Because bitcoin is subject to capital gains, you can also deduct any losses. 

Let’s say you bought one bitcoin at $10,000. You sold a few months later at $7,000, incuring a $3,000 loss. You can claim that bitcoin loss on your tax forms and it will lower your tax obligation.

You can also include transaction fees in your calculations.

In this case, because you held for less than a year, it falls under short-term losses. You can deduct that against any other short-term gains that year. If you have no short-term gains at all, you can still deduct the loss.

However, there’s a $3,000 limit on total losses. Any more than that and you can roll it over to the next year and deduct against any future gains.

If you held bitcoin for longer than a year, you can deduct the loss against any long-term capital gains. And, like before, if you have no long-term capital gains, you can simply deduct the loss. The same $3,000 limit and rollover rules apply.

Conclusion

Bitcoin taxes can be a tricky thing to get your head around. But you can claim bitcoin losses on your tax return which is a small benefit of the tax system.

Disclosure: I am not a tax advisor and you should contact a qualified tax attorney or account, preferably one knowledgable in cryptocurrencies. A list of such individuals is available here.

Cryptocurrency

Bet your bottom dollar, you’ll want to keep a clear account of your cryptocurrency income.

In its recent IR-2018-71, the IRS warned that virtual currency transactions are taxable by law and that people who fail to report their cryptocurrency income, file cryptocurrency late, or file crypto taxes improperly may incur penalties and interest.  

When the IRS speaks, you should notice!

Which accounting model should you use?

You may think that virtual currency is a digital asset and, therefore, should be recorded as such, but since cryptocurrency has no status as legal tender, the IRS requires us to treat it as a property transaction.

Among other things, this means that cryptocurrency investments are bundled under short and long-term capital gains. The amount of tax you pay depends on how long you hold your cryptocurrency.

Thus:

  • Short-term capital gains:  If you hold Bitcoin or another cryptocurrency for less than a year, you’ll be paying regular income tax as with regular property tax. This is anywhere from 10 to 37 percent of your cryptocurrency income depending on your income level.
  • Long-term capital gains: If you hoard your cryptocurrency for longer than a year, you’ll pay long-term capital gains tax, which caps at 20 percent of your cryptocurrency income.

The crazy implication of this plan is that the longer you sit on your Bitcoin, the fewer taxes you pay – which is more reason to “hodl” your currency.

7 other IRS implications and rules

  • Payment made using virtual currency has to be reported using the same rules as any other payment made in property. This means the taxpayer who receives virtual currency as payment for goods or services reports how much that digital currency was in USD on the date that cryptocurrency was received. All transactions are converted to and reported in U.S. Dollars.
  • Payment made to an independent contractor, or freelancer, of $600 USD or more has to be reported on Form 1099-MISC using the fair market value of the virtual currency in U.S. Dollars of the date of payment.
  • As with all property tax, it is the payee, not the payor, who deducts tax. For that reason, the payor must ask the independent contractor for a  taxpayer identification number (TIN) and can only pay his worker once that is received.
  • Gain or loss depends on whether the virtual currency is a capital asset, like stocks, bonds, and other investment property. If it is merely a utility token, i.e., a token used by ICOs to operate their system, there’s no tax. Tax only incurs on virtual currency that can be converted to USD, Euros or other money, namely if the coin has economic value. The IRS refers to this kind of cryptocurrency as “convertible virtual currency”.
  • Someone who mines virtual currency needs to report the exchange value of any income received from that mining in USD. He uses that current exchange value on the day his income was received. Income is reported on either an IRS Form W-2 or an IRS Form 1099, depending on whether the miner works for himself or others.
  • Wages paid in cryptocurrency are reported by an employer on a Form W-2.
  • Wages using virtual currency to independent contractors and freelancers are taxable and the regular self-employment tax rules apply. Payers must issue Form 1099.


    Foreign Asset Reporting Requirements

If you have more than 10,000 bitcoins in a non-US/ offshore account, use the following forms to report your stash:

Donating Helps you Save

Make some Bitcoin, Ether, or Dash donations to some non-profit charity, and you may be able to see some deductions on your taxes as well as avoid tax on your gains. This applies only to cryptocurrency that has recognizable value.

Cryptocurrency Amendments since Jan. 1, 2018

  • No More Like-for-Like loophole

Like-for-like allows you to swap one item for a similar one within a certain time period (typically 180 days), so you may be able to avoid taxes. Since the IRS pegs cryptocurrency as property, and since property investors use the like-for-like loophole for assets like real estate, art, or racehorses, you’d think we’d have this loophole for Bitcoin too.  The loophole existed until the current administration did away with it in January 2018. 

  • No more Cryptocurrency Tax Fairness Act

Before the Trump administration, there was a Cryptocurrency Tax Fairness Act (CFTA) that waived tax from cryptocurrency transactions under $600.  So, say, you used Bitcoin to buy a cup of coffee, you didn’t need to add tax to that Bitcoin transaction. The new tax rules added tax to every itty-bitty purchase – that cup of coffee too.

Bonus: 3 cryptocurrency tax resources

  • Coinbase – A free tool for calculating cryptocurrency taxes that, more or less, works as long as you use it for simple hoarding, rather than trading, and as long as you stash your cryptocurrency with Coinbase. (Warning: The moment you send your coins to an external wallet or another site, Coinbase may inaccurately report these transactions as “sales”).
  • BitcoinTax – There’s a free version for transactions done by any cryptocurrency, as long as the transactions are simple and deal with small amounts, For unlimited and more complex transactions, BitcoinTax offers a 19.95 version per tax year.  This option is your closest to a qualified accountant and may be valuable if you trade in cryptocurrency.
  • Bitcoin Tax Attorneys, CPAs, and Accountants – For complex trading and accounts, you’ll likely want a qualified tax attorney, CPA or tax accountant who knows Bitcoin and digital currencies. That’s where the Directory of Bitcoin Tax Professionals helps you.

 

 

finland

Tax authorities in Finland have begun matching bank records to cryptocurrency transactions in an effort to track down suspected Bitcoin tax cheats.

English-language Finnish news outlet Metropolitan.fi reports that Timo Puiro — the tax office’s inspector general — has identified at least 3,300 citizens who owe taxes related to gains accrued while trading cryptocurrencies. Collectively, they owe about 30 million euros in capital gains taxes — a tenfold increase from 2016.

According to the report, the tax office has taken advantage of “generous access” to bank transfers and other financial data, which officials have been able to successfully link to Bitcoin transactions from cryptocurrency exchanges and other trading platforms.

Using this data, the tax office has been able to identify Finns who taxes on their cryptocurrency gains, and it will scrutinize their annual tax returns to determine whether they pay them.

The latest date that taxes can be filed in Finland is May 15, so it is unclear whether residents are paying their cryptocurrency-related taxes.

However, the fact that many cryptocurrency investors do not report cryptocurrency trading on their tax returns is well-documented. US financial services company Credit Karma has said that among users of its tax preparation software cryptocurrency reporting is at “negligible levels,” and the Internal Revenue Service (IRS) has contracted with a blockchain forensics firm in the past to help the agency track down Bitcoin tax cheats.

Cryptocurrency exchange Coinbase was also recently forced by a court order to provide the IRS with access to customer records for high-volume users.

As BlockExplorer reported, tech conglomerate Amazon recently won a patent for a data streaming marketplace that would transmit information in real-time. The company identified catching Bitcoin tax cheats as one potential use case for the marketplace. Under the system, law enforcement agencies could subscribe to data streams for Bitcoin transactions and shipping information or bank records and then use in-app analytics tools to identify correlations in the data.

Featured Image from Pixabay

Cryptocurrency

A study has found that only a tiny percent of people have reported their cryptocurrency gains and losses to the Internal Revenue Service (IRS) so far this year.

According to Credit Karma, a free credit monitoring app, fewer than 100 people, out of the 250,000 who have already filed their federal taxes this year through the company, disclosed a digital currency transaction to Uncle Sam, reports Reuters.

This is notable considering a preliminary survey conducted last month by Qualtrics, a credit score startup and research firm, found that 57 percent of the 2,000 Americans surveyed indicated that they had made some gains with digital currencies. Of those questioned, though, 59 percent said that they had never reported these taxable gains to the IRS.

Jagjit Chawla, General Manager for Credit Karma Tax, said that the results weren’t too surprising:

“While so few people have reported Bitcoin and other cryptocurrency gains or losses, we’re not surprised. Generally, Americans with more complex tax situations file later in the tax season, especially if they expect that they’ll owe money. However, given the popularity of Bitcoin and cryptocurrencies in 2017, we’d expect more people to be reporting. We encourage anyone who thinks they may have cryptocurrency-related gains or losses to visit Credit Karma Tax and take advantage of the resources we have available for them.”

In a bid to gain access to the records of cryptocurrency investors, the IRS successfully sued digital currency exchange Coinbase in November. As a result, a federal court judge ordered the San Francisco-based company to comply with a summons that required it to identify 14,355 accounts.

The order, covering transactions between 2013 and 2015, was the result of an on-going battle between the two when the IRS initially ordered Coinbase to hand over the personal information of more than one million accounts.

Even though the cryptocurrency community has been evasive about any profits they’ve made, plenty will have made gains after a surge in bitcoin’s price last year. At present, it now costs just under $8,600 to purchase one bitcoin. Notably, though, digital currency investors are saying that traders need to comply with the IRS.

Speaking at a CB Insights’ Future of Fintech conference in June, Mike Novogratz, former hedge fund manager at Fortress Investment Group, and now CEO of Galaxy Digital, said:

When I talk to the blockchain community, I’m always pushing [them], I’m like, “Dude, A, pay your taxes.’ Because nobody in that space pays taxes. Listen, the IRS is gonna come after people. People are making real money now and the IRS isn’t stupid.

The IRS project that around 156 million people will file their federal taxes this year.  Even though it’s still early in the year, so far the IRS has received just over 18.3 million tax returns. Last year, around one million people filed their taxes with Credit Karma’s services.

Additionally, Jagjit wanted me to share the following tips that our readers may find helpful:

  • Cryptocurrencies are considered property by the IRS. The IRS considers anytime someone buys, sells, trades or mines a cryptocurrency a taxable event.
  • How long someone held onto their Bitcoin or other cryptocurrency can affect their tax liability:
    • If you held cryptocurrency for more than a year, you’re likely looking at long-term capital gains or losses.
    • If you held your cryptocurrency for less time, you could be looking at short-term capital gain or losses.
    • The tax rate on most net capital gains generally won’t be higher than 15 percent for most taxpayers.
  • It’s important to accurately track all your cryptocurrency trades and record the value of each current fair market value (in U.S. dollars) and the dates of receipt, as this information can help you report your cryptocurrency transactions on Form 8949 and Schedule D.

Edit, 1354 CST: Updated comment from Jagjit.

Featured image from Shutterstock.

coinbase

A U.S. District Court judge has ordered bitcoin exchange Coinbase to provide the Internal Revenue Service (IRS) with the transaction records of more than 14,000 customer accounts.

The ruling (PDF), which was filed in the Northern District of California’s San Francisco courthouse, compels Coinbase to provide the IRS with customer records for accounts that had at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any single year from 2013 to 2015. Coinbase estimates that 14,355 accounts will fall subject to the purview of the summons.

Since the IRS classifies cryptocurrency as property, all cryptocurrency holdings are subject to capital gains taxes at the time of disposition. However, the IRS claims that virtually no U.S. taxpayers have reported bitcoin-related investment income on their annual tax returns. Armed with this data, the agency will be able to identify and levy penalties against investors who have skirted their legal obligations to pay taxes on their bitcoin investments, and — in some cases — prosecute offenders for tax evasion.

“That only 800 to 900 taxpayers reported gains related to bitcoin in each of the relevant years and that more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year suggests that many Coinbase users may not be reporting their bitcoin gains,” U.S. Magistrate Judge Jacqueline Scott Corley wrote in her ruling. “The IRS has a legitimate interest in investigating these taxpayers.”

The ruling did not come as a surprise. Earlier this month, the judge told Coinbase in a hearing that she was inclined to “give tremendous discretion to the agency as to how they investigate” whether people are making money on their bitcoin investments. Following that hearing, Coinbase published a blog post that more or less conceded defeat but took solace in the fact that the company had successfully forced the IRS to narrow its initial summons, which sought records from approximately 500,000 customers.

Despite the narrow focus of the final order, the successful defense of the summons will likely encourage the IRS to ramp up its efforts to bring bitcoin users into compliance with tax reporting obligations — particularly following the industry’s dramatic growth in 2017.

Featured Image from NPR/Dennis Brack/LandovIRS-v-Coinbase-order