For those who follow this blog, you’ve probably read my recent article, Cryptocurrency and Taxes Part 1, which discussed the importance and basics of filing with the IRS in the United States when you have any gains in cryptocurrency. However, for those of you who are serious cryptocurrency traders or investors, that article probably left you with many unanswered questions and holes in your information. Which is why I’ve written this follow up article which contains more information and resources for the most serious of traders.
High Volume Traders
Whether you are trading large or small, the more times you trade, or buy or sell a coin, the more complicated it gets to calculate the net gains you’ve received. The first step is to keep a detailed log of all your cryptocurrency trades, including any costs or fees you incur from using certain platforms for your trades. Then you’ll need to find your cost basis, which is basically the amount of money you put into the purchase of your cryptocurrency. For this, you’ll take the price of your cryptocurrency plus any associated fees divided by the quality of your holdings. The next step is to subtract this number from the fair market value or price at which you sold your cryptocurrency. The result of this equation is the gain to which you owe the IRS taxes. In the same manner, if you experience losses, you can use this mathematical process to calculate your losses and report those in order to receive tax breaks.
Then you will take your net gains and fill out IRS form 8949 and 1040 Schedule D. Now if you’re like the average American, these forms can almost be trickier than the math of calculating your net gains. If you have questions about these forms you can look at websites like Bitcoin.tax or Cointracking.info for help, and if you still have questions after that, it’s best to consult a tax professional for help to be sure you’re reporting your gains correctly. Because even if you do the math correctly, if you fill out the form incorrectly you could face an IRS audit and owe fines for your reporting error.
Now if you have numerous transactions or lots of cryptocurrency to cryptocurrency trades, you’re probably looking at the above equation and wondering just how you’re going to go through all your purchases and sales and calculate your net gains for each and every one. Especially if you have multiple coins, this could take hours. Luckily you aren’t alone and many businesses have come forward to help with filing cryptocurrency taxes.
Cryptocurrency Tax Software
One of the most useful ways to file your cryptocurrency related taxes is CryptoTrader.tax, which is software built specifically with cryptocurrency traders in mind. This software allows users to analyze all of their trading activity even as it crosses platforms and coins. It does take some time dedication as users have to insert in all the information of their various sales and trades, but if you keep up with it as you execute each trade, it makes it easy at the end of the year when tax time comes around as it will auto generate all the necessary tax forms that apply to the specific individual.
Not only is this software available for your use as a cryptocurrency trader, but CryptoTrader.tax offers full software add-ons for companies or CPA’s to use on a private basis. In fact, in January 2018, they partnered with TurboTax and integrated into their system, so if you use TurboTax to file your taxes, you don’t need to visit CryptoTrader.tax as TurboTax will use the same software to autogenerate the required forms you need.
Information for Miners
For those of you that mine cryptocurrency, you also have to pay taxes, and you will have to do so at two separate times. Miners need to report cryptocurrency both as income as they mined it as well as report it as capital gains when they sold the coins which they mined. And to make matters more complicated (the IRS never likes to make it easy) Miners have to report differently when they mine as a hobby or if they mine as a business entity. If you’re a Miner and not a tax pro, it’s probably best to both consult someone who is a tax pro as well as use the software discussed above to make sure you are properly reporting your gains and income from mining.
Penalties for Not Filing
Now all of this seems very confusing, and daunting, and a lot of people may think it’s easier to just not file at all. And while this may seem like a good solution, the IRS is on to crypto traders and as of May 12th, 2020 has started showing signs that they will be cracking down on those who traded crypto and didn’t claim their gains. If you don’t claim the money you’ve made through the sale of cryptocurrencies you face criminal prosecution and fines which could extend to an upwards of $250,000. And not only that, but violators could face up to five years in jail if they are found to be guilty of tax evasion. Many people who invest or purchase cryptocurrencies do so because they enjoy the anonymity of a decentralized currency. Just because the currency itself is anonymous doesn’t mean the ledger is untraceable and the IRS is hiring a contractor to attempt to trace wallets back to their respective users.
Either way, as a crypto trader, it’s in your best interest to keep track of all of your transactions and claim them properly when tax time comes around. And if you have questions, consult a professional or use professional software to avoid making errors which could end up costing you hundreds of dollars in fines if you make an error. And it isn’t just American cryptocurrency traders who need to file taxes on cryptocurrency gains, many other countries such as Canada and the UK are cracking down on people not claiming their cryptocurrency gains as well, so make sure you research your country’s laws and requirements and do your best to file properly to avoid any possible penalties and fines.