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RETAIL REPORT: Tips for Demystifying Cryptocurrency Taxes

Traders Magazine Online News, February 14, 2019

Sean Ryan and Perry Woodin

As if the steady decline in the value of cryptocurrencies since the beginning of 2018 wasn’t bad enough, investors are now faced with the challenge of navigating the minefield that is filing taxes on their crypto assets.

Sean Ryan

Though we recently passed the ten-year anniversary of Bitcoin, tax authorities (both in the U.S. and abroad) have a lot to catch up on where issuing guidance is concerned. In spite of growing interest in Bitcoin by major financial players like hedge funds and banks, in addition to retail investors, the regulatory landscape hasn't adapted to accommodate the burgeoning crypto asset class. 

Efforts so far have largely sought to simply shoehorn cryptocurrency guidance into existing frameworks, with little regard for the specifics of how they function or the unique traits that set them apart from other assets covered by regulations. 

First and Foremost - For Taxes, Crypto is Property

The IRS qualifies Bitcoin and other “convertible virtual currencies” as property for the purposes of taxation, meaning that they should not be treated like a traditional currency. Taxable events can be triggered by a number of actions – selling for fiat and trading for other cryptocurrencies, but also for purchases of goods or services with the asset. Some activity is exempt from taxation.  Transfers from wallet-to-wallet, wallet-to-exchange, etc. do not result in a taxable event. Gifts may also be exempt from tax provided they fall within the rules of IRS Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return. Charitable donations under the gift thresholds may also be tax free and have an added benefit of reducing your income by the appreciated value of the asset. For example, if the gift threshold for which no tax is required is $15,000/year and you purchased $1,000 worth of crypto which appreciated in value to $15,000 and donated it to a qualified charity, you can claim a $15,000 deduction and pay no tax on the $14,000 gain.

Detailed record keeping is key. For every digital asset owned, investors should be logging the entire life-cycle and it’s not as simple as it may appear. The actual value received (or its fair market value in the case of mining) must be tracked as the asset moves from exchange to wallet, to another wallet, back to an exchange, and finally disposed of in a sale or payment. Life-cycles may be very short or often times very complex involving multiple stops with network and exchange fees chipping away at its value.Such record keeping is crucial in order to later calculate their gains/losses, and ensure that the correct tax is being paid. Fortunately, software can handle this for you.

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