It’s every one’s “favorite time” of the year again.
As one of life’s two certainties, taxes can be well… the most taxing. But if you’re aware of what you can and cannot do with your money, the better off you are.
While there’s still a lot of time before Tax Day April 17, gathering your information as a crypto user can be an extra time commitment. If you’ve filed for cryptocurrency before, you already know that it often requires a little more legwork than other assets.
The IRS Means Business
Cryptocurrency may not be legal tender, but it is still taxed, unfortunately. The IRS has made no bones about this, and they recently issued a reminder, as well as a warning about the consequences. According to a section of IRS Notice 2014-21, “Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000”.
What they don’t provide much of is helpful information or forms tailored to digital assets. However, the overall rule is to treat cryptocurrency as property, and to report any gains or losses. Furthermore, they require you to keep a record of and report smaller transactions or minor purchases.
Some exchanges try to make the process easier
Coinbase, for example will organize your history into a year-end statement for taxes. They’ll also compile the data on cost-basis, which of course can be volatile. If all else fails, you can always do some chart-reading online to backtrack as long as you know the dates. However, you’re on several of the hundreds of exchanges out there, you may be aware that the prices aren’t always consistent. For this reason, cost-basis can often be the most challenging issue with cryptocurrency.
What About Mining and Airdrops?
Mining income is taxed as capital gains as well. Fortunately, you only need to pay for net gains, and you can write off electricity as an expense. The only questionable territory is airdrops, though most experts suggest erring on the side of caution. For these, the original cost is $0.
A Few Options for Reducing the Stress of Cryptocurrency taxes
Many taxpayers with cryptocurrency opt to file for an extension, with legitimate reasons. Additionally, many accountants have begun specializing in Bitcoin (BTC) and other popular cryptocurrencies in recent years, in addition to crypto-specific online tax services. If you’re really facing a headache, you may want to weigh the value of paying someone else to do it.
Although the IRS doesn’t detail all the ins-and-outs, their general expectations are clear. It’s usually better to be conservative and do the best you can to comply and provide accurate information.
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