You sold some bitcoin. Now the IRS wants its cut.
Before you hop into this explanation of how cryptocurrency affects your taxes, check out our very first article ter this series: Bitcoin, explained.
It’s bot a wild rail for cryptocurrency enthusiasts overheen the past few months.
After ascending to a high water mark of $Nineteen,205 te December 2018 , the world’s preeminent cryptocurrency — that’s bitcoin — shed more than half its value overheen the 60 days that followed. (Spil of mid-February, it’s climbed back past $Ten,000.) Other virtual currencies, including Litecoin and ether , also spotted precipitous drops.
Now, te the wake of that dramatic sway, it’s time to embark thinking about taxes.
The freewheeling universe of cryptocurrencies has so far mostly evaded the cumbersome, elaborate regulations customary ter most other US financial markets. That’s likely to switch ter 2018, however, given the SEC’s closer scrutiny of virtual currencies . Te fact, a number of state and federal agencies are increasingly worried about the individual and systemic risks cryptocurrencies pose. Those range from good old-fashioned fraud to more novel cybercrimes, spil well spil the distinct possibility the government has forfeited massive amounts of tax revenue to this secretive market since 2013.
The chairmen of the US Securities and Exchange Commission and Commodity Futures Trading Commission testified at a Senate hearing about virtual currencies te January.
The attention is likely warranted. An SEC lawsuit filed against Coinbase last year exposed that fewer than 900 taxpayers reported gains related to bitcoin inbetween 2012 and 2015, even tho’ more than 14,000 Coinbase users recorded transactions of $20,000 or more during the period.
While legislators ponder fresh rules, and regulators consider how existing ones might apply to this fresh sphere, the IRS has already made itself pretty clear: you have to pay taxes on cryptocurrency. But, like everything associated with the blockchain ter 2018, the nascent branch of crypto tax law is very much a work ter progress.
So, if you bought — and more importantly, if you sold — bitcoin or any other cryptocurrency te 2018, read on. April 15 is coming.
Note: The following applies to US citizens and resident aliens. If you made money from cryptocurrencies ter foreign countries, you may also have to pay taxes there.
I bought some bitcoin (or other cryptocurrency). Do I need to report it on my taxes?
Not necessarily. It all depends on what you did after you acquired it. For now, the IRS shows up to regard bitcoin and other cryptocurrencies like stock. So, if you bought bitcoin and held it all, no activity is needed.
OK, I sold some bitcoin. Do I need to report it on my taxes?
Yes. Once you sell, and “realize” a build up or loss, you need to report it — and pay taxes on any capital gains.
What are capital gains and losses?
Ter brief, they’re the difference inbetween how much an asset cost when you bought it and when you sold it. If the price went up, it’s a capital build up. If it went down, it’s a capital loss. The IRS has published a longer and much more detailed explanation.
The other thing to know about capital gains is that the IRS categorizes them spil short-term or long-term. Generally, the proceeds associated with assets you held for more than 365 days would be classified spil long-term capital gains, which are typically taxed at 15 procent. Any assets held for a shorter time are short-term gains, and taxed like ordinary income — at rates that can go spil high spil 37 procent.
Of course, this works both ways. If you lost money on your crypto-shenanigans ter 2018, you can deduct those losses on your comeback. (The IRS boundaries capital loss deductions at $Three,000 vanaf year.)
How do I calculate cryptocurrency capital gains and losses?
For each trade — partial or finish — you’ll need to know the following details:
- When you bought the coins
- How much you paid for them (te USD)
- When you sold the coins
- How much you received for them
The more sophisticated exchanges may have a reporting mechanism to help you collect this kleintje of information. Otherwise, unless you’ve kept detailed records of your own, you may need to root through your email, canap or wallet receipts.
Once you have that information ter mitt, there are several options available for doing the math. For example, some investors use the “very first ter, very first out” (or FIFO) methodology, wherein the very first coins you buy (and the price they cost) are also the very first coins you sell. Wij won’t voorkant all of the methods and maths here. You can use Google to learn more about the options for calculating capital gains.