Is My Cryptocurrency Taxable? 9 Tips for Smart Trading

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Cryptocurrencies are becoming increasingly popular. 它们被用作货币的一种替代形式,也被用作投资未来的一种方式. 然而,有很多人不确定他们的加密货币交易是否应纳税.

If you are thinking about investing in cryptocurrencies, then you should know that you could potentially owe tax on your gains. In this article, we will discuss the basics of cryptocurrency taxation, and give you some tips on how to be smart with your cryptocurrency trading.

1. Understand the Basics on Current IRS Guidance

Why is it that cryptocurrency was immediately considered taxable by the IRS without Congress passing any new tax laws? Because the tax code defines gross income by exclusion, meaning that gross income is all income from whatever source derived.

The definition of “income” based on longstanding case law is:

  1. an undeniable accession of wealth;
  2. that is clearly realized by an objective identifiable event; and
  3. over which taxpayers have control.

Therefore, the definition of income and gross income is intentionally broad and overinclusive. And without Congress passing a law that specifically excludes taxation on gross income, the income is taxable under the Internal Revenue Code.

So, for example, what happens if you find a bag of money on the street? Taxable. Why? Because there is no code section excluding it from gross income. 这同样适用于加密货币——尽管在它出现之前,国会从未考虑过它, 它立即被征税,因为在税法中没有排除税收.

Even though it was immediately clear that cryptocurrency was taxable income, the 由于缺乏国会和国税局的指导,纳税人不知道该如何报告 on their tax returns.

Some of the early IRS guidance provided the basics on IRS taxation of cryptocurrency:

  • For federal income tax purposes, it is considered property, not currency
  • Investment gains and losses are treated similarly to securities trading
  • It is subject to similar reporting requirements already existing for cash payments, such as issuing 1099s when using cryptocurrency to pay for goods or services
  • 是资本还是普通损益,取决于纳税人手中是否属于资本资产
  • Receipt of cryptocurrency may be taxed as ordinary income when received as payment for services or as a part of an active trade or business

如果你想更深入地了解上面提到的税法和相关判例法, then see IRC Section 61 for the definition of gross income, Commissioner v. Glenshaw Glass Co, 348 U.S. 426 (1955) for the definition of income, and IRS Notice 2014-21 for cryptocurrency FAQs.

2. Understand and Defer Gain Triggering Events

出售虚拟货币换取现金并不是导致应税事件的唯一一种处置方式. In fact, virtually 任何加密货币的处置都将导致被视为销售,被视为应税事件. Exchange for “other property” is considered an exchange that generates a gain or loss. At this time, if the FMV of the cryptocurrency exceeds the basis, then the taxpayer has a taxable gain; if the basis exceeds the FMV, then the taxpayer has a loss.

交换其他财产还包括使用数字资产购买商品或服务. For example, if you bought the cryptocurrency for $100 and then, at a time when it is worth $1000, you use it to purchase a $1000 piece of equipment, then you have a $900 taxable gain.

This is the most basic taxation behind cryptocurrency that is undisputed, but the complexity comes in when:

  1. determining the character (capital or ordinary) of the gain;
  2. tracking the basis since usually taxpayers do not generally purchase or sell all their cryptocurrency at one time like in the previous example; and
  3. keeping up with substantial and often unclear reporting requirements.

3. Avoid Capital Losses and Wash Sales

The character of cryptocurrency gains or losses can be either capital or ordinary.

  • If you have a loss, then you want it to be considered ordinary because the full loss would be deductible compared to capital losses that have a $3,000 net loss limitation per year.
  • If you have a gain那么你希望它被视为资本,如果持有一年以上,可以享受优惠税率.

Since the character is determined at the time of acquisition and usually does not change since it is based on the intent of the purchase in the hands of the taxpayer, you will want to pay close attention to the character before disposing of the asset and having an unintended tax consequence.

如果加密货币是一种资本资产,那么它就会受到资本收益和损失的影响. Capital assets, much like gross income, are defined by exclusion in the tax code. Capital assets are not inventory, depreciable property used in a trade or business, land used in a trade or business, certain intangible assets, accounts receivable, and a few other more specific items not expected to be applicable to cryptocurrency.

The simplest way to view this is that cryptocurrency is a capital asset when held as an investment in the hands of a taxpayer, and it is not a capital asset when acquired in an active trade or business. For example, if you buy a cryptocurrency and hold onto it in hopes of it going up in value, then it would be a capital asset. However, 如果你正在挖掘加密货币作为一种活跃的交易或业务,或者在接受服务时获得它, then it would be characterized as ordinary.

Just like with securities, 最糟糕的税务结果之一是最终出现巨额净资本损失,因为除了3美元之外,这些损失是不可扣除的,000 per year, 因此,许多纳税人将在获得税收优惠之前将这种损失结转多年. However, even worse is when a sale is considered a wash sale. A wash sale is when a type of security is sold and repurchased within 30 days.

While this rule is currently limited to securities, 国会在最近的税改提案中也包括了将这一规则应用于加密资产的内容. Taxpayers often accidentally run into an issue with wash sales when they are actively trading and finding out at year-end that losses incurred are not deductible purely due to the timing of the sale or disposition.

4. Minimize Ordinary Income from Mining or Receipt of Crypto for Services

The IRS has provided guidance that states that a mining operation is a trade or business unless undertaken as an employee. This means the income is not only subject to ordinary income but also subject to self-employment tax.

Fortunately, this also usually means that the expenses from the business can be considered a business deduction as long as the business is intended to make a profit. Properly recording and accounting for business expenses attributed to the mining will decrease both the ordinary income and self-employment tax.

Mining often has substantial energy costs associated with it, especially with a Bitcoin transaction, so we recommend keeping records that show the electricity costs directly attributed to the mining business so you can minimize your tax obligations. Even when your ordinary income tax rate is only in the 20% tax bracket, the self-employment tax of 15.3% leaves many business owners surprised looking at their tax return as they are left paying a 35% effective tax rate, which is a rate that is usually expected only for the highest of earners.

In cases where taxpayers engage in crypto exchanges for services, a similar tax result occurs – it is considered ordinary income. If the services you are performing are as an employee, then it should be wages issued on a Form W-2 with social security taxes withheld, and if it is as an independent contractor then it is subject to the full 15.3% self-employment tax on the year-end tax return. 作为普通收入征税的加密货币金额是支付之日的公平市场价值.

5. Choose the Most Tax Advantageous Method for Gain Calculations

Since cryptocurrency is considered property for federal income tax purposes, 您出售的每个单独的加密货币项目都被认为有自己的成本基础. The problem with cryptocurrency versus other types of property, like real estate, is that the purchase price is very difficult to track individually, especially if you’re actively trading.

Since the industry is also mostly unregulated, 交易平台通常不提供有助于追踪的税务文件. Because of this, combined with unclear and changing regulations from Congress and the IRS, taxpayers, 纳税申报表编制人员在年底时难以正确报告加密货币活动.

There are several methods to use in calculating your taxable gain and you should choose the one that’s most favorable based on your situation. Once you choose a method, 除非您提交表格正式更改,否则您将保持相同的会计方法.

  • Specific identification method: Exactly what it sounds like – specifically identify each exact unit that is being sold to determine the cost basis for the taxable gain. This method requires keeping detailed records, including the date and time the units were acquired, the basis and FMV of the unit at acquisition, the date and time of disposal, and the FMV at the time of disposal.
  • Last in, first-out method (LIFO)此方法假设出售的加密货币来自最近购买的硬币. Those prices may be closer in cost to the sales price and can create a favorable result. 这种方法需要与具体的识别方法同样详细的记录保存, which can prevent some taxpayers from using it.
  • Highest in, first-out (HIFO): This method sells the coins with the highest cost basis first. It may likely result in a lower taxable gain. 该方法还需要与具体识别方法相同的详细记录保存.
  • First in, first-out method (FIFO):如果您没有足够的信息来进行特定的识别,这是默认的方法, LIFO, or HIFO. 该方法假设当您出售某种加密货币时,您正在出售第一次购买. 如果加密货币随着时间的推移而增加,这种方法通常对纳税人不利, just like stocks do in the long term. If the cryptocurrency you purchased earlier is lower than the ones purchased later, then your taxable gain will be higher upon sale since the cost basis will be lower.

To choose the most tax advantageous method for taxable gain, you’ll want to keep detailed records, 所以你和你的报税员在进行税务计划和准备报税时处于有利地位.

6. Minimize Tax Liability by Keeping Detailed Records in Real Time

In tip five, 全球官网电子游戏只是简要介绍了为什么保留详细记录以尽量减少自己的加密税对您至关重要, but thorough recordkeeping not only helps you utilize the best accounting method possible, it also gives you the support needed to prove any basis at all in an IRS audit.

Even with increasing regulation over time, 加密货币交易所没有与证券交易所相同的成本基础详细信息. As a result, while 1099-B forms can usually be relied upon by taxpayers for accuracy, 1099-B forms for cryptocurrency usually have an incorrect or incomplete cost basis, and this is not expected to be improved anytime soon. In an IRS audit, the burden is on the taxpayer to prove the cost basis, otherwise, agents usually assume it is the least favorable option, which is a $0 basis.

重要的是不仅要保持准确的记录,而且要保持实时的有组织的记录. Most IRS agents are unfamiliar with cryptocurrency, which means they will usually not want to put in extra effort to understand your records if they are not easily understood. In addition, the IRS and courts weigh records created at the time of the event much more heavily than records created at the time of the audit. This means that even if you are able to compile your records after the fact, they are usually provided less credibility when considered during your IRS audit.

7. Be Proactive with Reporting to Minimize Risk of Potential Penalties

美国国税局对几乎所有类型的违规行为都有处罚,加密货币也不例外.

The IRS tax forms are showing that cryptocurrency is now becoming a priority of the IRS. The 2019 federal individual income tax return was the first tax return where the IRS explicitly asked taxpayers whether they had dealt in cryptocurrency. On Schedule 1, the 2019 tax return asked “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency.” In 2020, the IRS moved this question to page 1 of the tax return, showing even higher prioritization. The IRS is now asking about cryptocurrency before they even ask about your dependents.

Even if you do not have a taxable event from cryptocurrency in a tax year, you want to stay on the conservative side and answer “yes” if you have had any type of activity or involvement with cryptocurrency in the respective tax year. The reason this question is crucial, even if you do not have taxable income in that year, is that this question can be used to show willful (vs. non-willful) behavior for any future noncompliance. If you check “no” in a year when you traded cryptocurrency, the IRS has a much clearer argument to say that you were intentionally noncompliant, opening the door to many more severe penalties as well as potentially increasing the number of past tax returns the IRS can go back and open up for audit.

Even though Uncle Sam is just getting a handle on cryptocurrency compliance, we are familiar with how the IRS uses these ‘yes’ ‘no’ checkbox questions because that is what they’ve done with the foreign compliance. The one small checkbox on Schedule B, asking about foreign bank accounts, has resulted in devastating consequences for taxpayers trying to prove non-willful noncompliance for foreign accounts. Since your income tax return is signed under penalties of perjury, all representations on it usually provide strong evidence for tax court cases and reliance on a tax preparer usually carries little weight.

All of the usual penalties apply to noncompliance for cryptocurrency, including the substantial understatement penalty, negligence penalty, late payment penalty, and interest, and in more severe cases, civil or criminal prosecution or fraud penalties. 由于加密货币可以在国外的银行账户中托管,因此也有可能受到外国的处罚.

8. Avoid Gray Areas in the Tax Law That May Result in Retroactive Noncompliance Penalties

Even if you’re compliant based on current guidance, there is always the potential for new guidance to be released that is considered retroactive. 这通常发生在合规的灰色地带稍后被澄清的情况下, rather than new law altogether.

One of the areas where there is no clear guidance is the exact foreign reporting requirements for certain types of cryptocurrency activity. We recommend always staying conservative on compliance, especially since it should not result in additional tax, and if the forms are later determined to not be needed, then there was no harm in filing them. However, if they are later determined to be necessary, you may be left in a situation where you’re trying to get penalties abated by the IRS.

9. Stay Up to Date on Tax Reform and Current IRS Guidance for Cryptocurrency

If you consider yourself a crypto trader or want to begin trading cryptocurrency, it is important to stay up to date with current IRS guidance and potential tax implications. If you have any questions, it’s important to consult with an experienced CPA or qualified professional who is up to date on the latest tax legislation and filing requirements. 他们将提供信息和收集所需的信息,以报告您在一年内的交易活动. This will allow your tax professional to make any necessary adjustments to keep you in compliance and avoid any stressful tax issues during tax season.

Consult with an Experienced Tax Professional

At DiLucci, 全球官网电子游戏经验丰富的税务专业团队可以帮助您满足您的个人或企业税务需求, including assistance with cryptocurrency and digital currency trading.

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As always, we’re here to help. Click here to schedule a consultation with our office and we’ll follow up with you promptly.

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