What You Need to Know About Cryptocurrencies and Taxes
If you had Bitcoin (or any other popular cryptocurrency ) in 2017, you’ve probably made tons of money. Now that tax season is on the horizon , you might be wondering how all this digital currency will affect your taxes.
The Verge has a detailed guide on how to deal with 2017 taxes when it comes to Bitcoin. Here are some key takeaways from the article to help you along the way.
Who needs to pay taxes on cryptocurrencies?
If you bought a bunch of bitcoins when they were cheap and are still holding onto them, then you are in luck. The IRS does not tax cryptocurrency assets that have risen in value. You only need to worry about taxes if you’ve sold your digital currency or used it to buy something else.
Any cryptocurrency you mine may also be taxed. The same applies to any coins you received from the Bitcoin fork in August 2017 , although the IRS still hasn’t made it clear exactly how this will work.
Here’s a chart from The Verge that should help you figure out how your crypto income will be taxed.
How to pay taxes on cryptocurrency
The first thing you need to do is create a record of all your cryptocurrency transactions. Some digital currency exchanges , such as CoinBase , will actually send you a 1099, but only if you’ve sold at least $ 20,000 worth of currency in at least 200 separate transactions.
Otherwise, you will have to search for your own records, although most of them should be publicly available thanks to the blockchain. Then download all your transactions as CSV files.
You also need to calculate exactly how much each transaction was worth in USD at the time of sale, which is challenging considering how volatile cryptocurrencies can be . Fortunately, there are many sites out there that can show you the value of bitcoins and other coins any day in the past. CoinDesk is a good place to start, with charts for Bitcoin, Ethereum, Bitcoin Cash, Litecoin, and Ripple.
If all of this starts to give you headaches, you can also take advantage of the free tax program that will do the job for you. All you have to do is upload the CSV files (and other relevant information) and these websites will determine how much you owe. Two popular options are Bitcoin.Tax (free up to 100 cryptocurrency transactions) and CoinTracking.Info (free up to 200 transactions).
Finally, you can fill out tax forms. Assuming you bought at a lower price than you sold (which should cover most people in 2017), you report earnings on Table D, which is attached to Form 1040. If you hold your money on an exchange that is not listed in the US , you will need to report to both the US Treasury and the IRS, but only if you have made transactions of $ 10,000 or more.
How to pay less
One of the easiest ways to pay less taxes on cryptocurrency is the same strategy used for regular taxes: charitable donations. The only catch is that you will need to find a charity that accepts cryptocurrency, since converting it into cash first would mean paying taxes on that transaction. There are still some great options out there, though, and The Verge suggests donating to The Water Project , Wikileaks, and the Internet Archive .
Another option is simply not to sell your cryptocurrency. Ignore the recent drop in value and trust that the price of bitcoin will rise over time. As long as you don’t spend them, you will not be taxed (unless, of course, they change the laws).
We still don’t know what to do with cryptocurrency and taxes.
There is a lot of information, but the truth is that it is still unclear exactly how people should handle their taxes when it comes to cryptocurrency.
The last time the IRS offered any formal guidance was back in 2014 . A lot has changed since then, and until the agency updates its rules, we’re all in the dark. Until then, do your best.