Tax reporting for cryptocurrency exchanges

Industry News & Expert Insight

2020 Guide to Crypto Taxes

FAQ + Other Helpful Answers

Crypto exchange

Produced via Cryptocurrency Tax Attorneys and Blockchain CPA’s

TaxBit has helped lots of taxpayers automate and record their cryptocurrency taxes. Although the choices IRS released its first guidance specifying that cryptocurrency is taxed as property in 2014, the beyond years has brought extended IRS enforcement and audits. The IRS typically audits two years in arrears, that means they’re presently auditing the 2018 tax 12 months. Notably, the choices IRS released a question on the newly released 2020 tax bureaucracy that asks each taxpayer “[a]t any time during 2020, did you promote, send, alternate, or otherwise gather any financial hobby in any virtual foreign money.”

With the choices IRS sending out tens of hundreds of audits for the 2017 and 2018 tax years, there may be elevated enforcement going ahead. Whether you most effective need to document crypto taxes for this upcoming 12 months, or in case you need to amend previous tax years, TaxBit affords all ancient tax paperwork for its customers protected in its Plus and Pro plans. TaxBit’s crew of tax specialists and software program developers are here to make the process simple and clean for taxpayers to record their cryptocurrency taxes.

Crypto exchange

What is the Definition of Cryptocurrency?

The IRS’ Definition of Cryptocurrency is,

Essentially, the IRS has a broad view of what classifies as digital currency.

TaxBit supports over 4,000 exceptional coins and assets and keeps to feature more upon consumer request.

How is Cryptocurrency Taxed?

In 2014, the IRS issued Notice 2014-21, clarifying that virtual currency is treated as assets for tax functions. This way that cryptocurrency is taxed as a capital asset and every taxable occasion need to be suggested on an IRS 8949 cryptocurrency tax form.

Beginning in 2020, the IRS added a new question to Form 1040 that asks taxpayers “[a]t any time in the course of 2020, did you acquire, sell, send, trade, or otherwise acquire any financial hobby in any virtual forex?”

If a taxpayer solutions “Yes” to the brand new question then the IRS will appearance to see if the taxpayer filed an IRS 8949 capital advantage/loss file for digital forex transactions. If the taxpayer fails to record their cryptocurrency taxes then the choices IRS can now show intentional push aside for knowingly failing to file cryptocurrency taxes.

Fortunately, much like the choices sale of inventory, 26 U.S. Code § 1211 of the choices Internal Revenue Code provides relief in the form of a deduction for losses on capital assets. If taxpayers had internet capital losses on their cryptocurrency for the choices 12 months then they will be eligible for an improved tax refund.

Non-Taxable Events

Cryptocurrency is taxed as property, which means you have to file profits/losses when removing an asset. Importantly, moving property among exchanges does no longer constitute a disposition of an asset and need to now not be said as a taxable transaction. Similarly, buying cryptocurrency isn’t a taxable event, instead it units the choices taxpayer’s value basis in the asset. Gifting cryptocurrency is likewise not a taxable occasion. (except for large items that may cause other tax duties).

Cost Basis Methods

After an awful lot anticipation, the choices IRS issued steerage on perfect value foundation strategies for calculating gains/losses on cryptocurrency.

Prior to the IRS’ guidance there were severa capacity fee basis challenge techniques taxpayers have been deciding on from together with:

However, the choices IRS’ new guidance in particular allows for handiest cost foundation assignment strategies:

Pursuant to FIFO, the choices first property that you obtain will be the choices first property in an effort to be disposed of. In the instance above using FIFO for the choices disposition of 2 BTC would bring about taxable gains of $7,000.

Pursuant to the IRS’ current revenue ruling, taxpayers might also use precise identity to record cryptocurrency taxes. Specific identity lets in taxpayers to pick which belongings they are removing. For example, inside the preceding example the taxpayer is able to especially discover that they are getting rid of assets that have been obtained on July 1 and September 1. Using the identical example of casting off 2 BTC above, the usage of Specific ID would result in a $2,000 internet capital loss rather than a $7,000 net capital gain.

Using Specific ID to Select which property you are disposing of can optimize your taxes. For instance, it’s far normally higher to do away with property that have a better cost basis. Disposing of assets that have a higher value basis will bring about a decrease usual tax liability. Notably, the choices IRS has indicated that Specific Identification need to be applied on a “through change” foundation. It is arguably not allowed to use precise identification thru universally pooling belongings. TaxBit gives support for Specific Identification via trade on the way to legally maximize customers' taxes and to reconcile to any change issued 1099's. TaxBit automates the procedure through particularly figuring out the choices belongings by using alternate with the very best fee foundation for disposition and consequently reducing realized taxable gains.

Taxpayers ought to arguably still report using unique identity, however then pick to allocate their asset’s foundation primarily based in keeping with LIFO or any other tax calculation technique. TaxBit takes the placement that the use of Specific ID and allocating in line with LIFO makes little experience due to the fact if a taxpayer makes use of Specific ID then it nearly continually makes more sense to eliminate the very best price basis asset.

Cryptocurrency Fees & Cost Basis

Prior to the Tax Cuts and Jobs Act (TCJA) positive investment-related fees have been eligible for itemized deductions. For tax years 2018 to 2025 these deductions were removed. However, cryptocurrency investors can nevertheless store cash on their transactions fees by means of adding the choices fee of charges into their price foundation on the acquisition of crypto and deducting charges from the proceeds from the disposition of the asset.

Prior to 2018, if taxpayers chose to say the choices itemized deduction and deduct cryptocurrency trade costs as funding associated prices, then they might not be eligible to adjust their price basis for costs.

However, in 2020, with the choices investment-associated charges itemized deduction removed, taxpayers can account for all expenses the choices equal way by including them into the purchase and disposition fees.

If a taxpayer buys $10,000 really worth of Bitcoin and can pay $500 in expenses, then the choices IRS allows you to record a value foundation of $10,500. Adjusting for prices permits a lesser realized taxable benefit.

This same instance applies inversely for expenses from proceeds from promoting cryptocurrency.

If the taxpayer sells their Bitcoin for $eleven,000 and will pay $500 in expenses, then the IRS permits the taxpayer to deduct the choices $500 from the continue amount. In this situation the choices taxpayer might report proceeds of $10,500 from selling the crypto.

In the choices above example, if expenses had been no longer accounted for then the choices taxpayer might have a price basis of $10,000 in the Bitcoin and proceeds of $eleven,000. This could result in a $1,000 taxable benefit. However, if prices are accounted for then the taxpayer could have a price basis of $10,500 and proceeds of $10,500, leaving them without a taxable profits.

Cryptocurrency buyers frequently make loads, if now not heaps of trades a year. Properly accounting for expenses on every transaction may be nearly not possible to do manually. Fortunately, TaxBit mechanically accounts for change expenses.

Tax Rate (lengthy-time period as opposed to quick-term capital gains)

The United States distinguishes among lengthy-time period and quick-term capital profits. If you maintain a selected cryptocurrency for twelve months or less your transaction will represent brief-time period capital profits. Short-term capital gains are delivered to your earnings and taxed at your regular profits tax charge.

If you held a selected cryptocurrency for multiple year then you are eligible for tax preferred lengthy-time period capital profits. In 2018 the choices capital profits tax quotes are both 0%, 15% or 20% for property held for greater than a 12 months. Capital profits tax fees on property held for less than a year correspond to regular earnings tax brackets (10%, 12%, 22%, 24%, 32%, 35% or 37%).

For single filers you may pay:

For married filers submitting at the same time you’ll pay:

Capital Loss Deduction/Carry Forward

The distinction among your capital profits and losses is called your “net capital advantage.” if your losses exceed your profits, you can deduct the choices difference for your tax go back, as much as $three,000 in losses in keeping with yr. If you’ve got internet capital losses for the choices year that exceed the choices deductible quantity then the IRS permits you to carry the excess into the next 12 months, permitting you to deduct it on that yr’s go back.

Other Cryptocurrency Events

Mining cryptocurrency has a completely unique trouble of making multiple tax implications that have to be pronounced on separate bureaucracy. Fear no longer, TaxBit’s cryptocurrency tax software clears up this difficult paradox and guarantees proper capital gain/loss and regular income tax reporting.

Pursuant to IRS Notice 2014-21, whilst a taxpayer efficaciously “mines” virtual currency, the choices honest market cost of the choices virtual forex as of the choices date of receipt is includible in gross income. This means that successfully mining cryptocurrency creates a taxable event and the choices cost of the choices mined cash ought to be blanketed inside the taxpayer’s gross earnings at the choices time it is received.

Selling mined cryptocurrency additionally creates a 2d taxable occasion. The price of the choices cryptocurrency at the choices time it’s far mined (the quantity protected as ordinary earnings) becomes a taxpayers value foundation within the capital asset. When a taxpayer sells mined crypto then the quantity acquired may be suggested as proceeds and might be offset against the choices taxpayer’s price foundation in the asset. If the fee of the crypto is higher at the choices time of the sale, then the taxpayer has a capital benefit. If the choices value is lower then the choices taxpayer can have a capital loss. Every sale or trade of mined crypto have to be suggested on an IRS 8949 cryptocurrency tax shape.

If you mine cryptocurrency as a alternate or business, then you may be eligible for positive deductions to reduce your tax legal responsibility. § 162 of the choices Internal Revenue Code states:

Miners may additionally deduct positive fees from their mining income.

Some estimates location the choices annualized worldwide mining sales at ~$five.6 billion and worldwide mining charges at $3.6 billion. These records display that fees may account for more than 50% of the choices profits received from mining.

Some frequent expenses that may be eligible for the trade or commercial enterprise cost deduction encompass:

Miners may additionally deduct the choices cost in their mining system from their ordinary mining profits. If the mining equipment exceeds $1 million in costs the choices taxpayer may also want to use the modified extended cost healing device (MACRS) to decide a way to depreciate the choices system for tax purposes.

A massive cost to mining cryptocurrency is the fee of energy. The energy used global to mine cryptocurrency is equal to the choices energy consumption of the choices u . s . a . of Australia. Electricity charges are an rate that if well documented can be eligible for the choices change or business deduction. To well record your power prices you ought to song the quantity of power this is used entirely for mining. If you are mining from your residence then you’ll want to music and allocate the amount that is on account of mining. Therefore, if you mine from your house then you definitely need to use a seperate meter to make sure you may properly allocate the choices power consumption from mining. It is important to music the choices strength charges from mining due to the fact you can simplest deduct enterprise charges aren’t eligible to deduct the electricity fees which you used for your residence.

If your mining system required repairs at some point of the 12 months then the choices restore rate can be eligible for the choices change or enterprise deduction. You need to save receipts to validate the fees in the event of an audit.

If you lease a space to maintain and run your mining gadget then you may be eligible to deduct the condominium prices as an rate. If your mining gadget is positioned at your residence then this will be treated just like a home workplace and can be extra tough to deduct the costs. See the choices regulations applicable to the home office deduction to see if you are eligible to deduct charges for the choices business use of your private home.

The IRS takes the location that hard forks that result in an airdrop of a new currency are akin to a dividend for tax purposes. Put honestly, a hard fork occurs when a dispensed ledger undergoes a protocol change resulting in a everlasting diversion of the choices continuing ancient ledger via a brand new airdropped token.

The IRS takes the location that you are taxed on the fair marketplace cost of the airdrops if you have “dominion and manage” of airdropped tokens. A taxpayer has dominion and manipulate when an trade issues the choices airdropped token into the taxpayer’s account.

IRS Enforcement of Cryptocurrency

All taxpayers are required to attest to whether or not,

Additionally, exchanges are required to trouble their customers 1099 tax paperwork that display that crypto interest happened on the choices platform.

If a taxpayer exams “sure” to the cryptocurrency question then the IRS will appearance to look if the choices taxpayer filed an IRS 8949 tax shape representing their cryptocurrency taxable events. If a taxpayer solutions “no” dishonestly to the choices query after which is eventually issued a 1099 tax shape from an change, then the IRS can now show “intentional tax evasion.” It is suggested to answer truly.

TaxBit is skilled in resolving cryptocurrency audits. The IRS is competitive in sending taxpayers CP2000 notices if the choices taxpayer changed into issued a 1099, however did not document their cryptocurrency taxes.

TaxBit’s tax specialists stand geared up to help users respond to CP2000 (and other IRS letters) primarily based on the taxpayers cryptocurrency pastime.

CPA Designed Audit Trail

Many cryptocurrency tax softwares provide a taxpayer with tax forms with out a information regarding how the users’ profits/losses have been calculated. Because of the dearth of an audit path, it is able to be tough to face up to an IRS audit with out a relied on provider.

TaxBit become based by way of tax legal professionals and CPA’s and therefore is aware of the significance of proving calculations within the occasion of an audit. TaxBit presents a CPA designed immutable audit trail that permits a CPA (or IRS investigator inside the event of audit) to drill down into any advantage or loss and notice precisely how the taxes have been calculated. Taxpayers can experience snug understanding that they have got visibility into how their taxes had been calculated and can prove their calculations inside the occasion of an audit.

TaxBit prides itself on being the choices maximum accurate cryptocurrency tax software. TaxBit strongly believes that tax accuracy and auditability is of the choices maximum essential aspect in selecting a cryptocurrency tax answer.

Foreign Reporting Requirements

There has been plenty debate whether assets held on a foreign digital foreign exchange are required to be said on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

The AICPA Virtual Currency Task Force reached out to Treasury’s Financial Crime Enforcement Network (FinCEN) to reply whether cryptocurrency on offshore exchanges calls for FBAR reporting. FinCEN replied that guidelines (31 C.F.R. §1010.350(c)) do not outline virtual currency held in an offshore account as a form of reportable account. Therefore, cryptocurrency does not want to be reporting on an FBAR as of now. That being said, FinCEN has indicated that in the destiny it can amplify FBAR reporting to overseas cryptocurrency accounts.

Tax Forms from Exchanges (1099-K/1099-B)

A few cryptocurrency exchanges have issued 1099-K’s, that’s an informational go back that sums up the entire fee a consumer has received throughout the choices 12 months. This form leads to reporting of profits while no income was truely generated on an alternate.

If you acquired a 1099-K from a cryptocurrency trade you then additionally in all likelihood acquired (or will obtain) an IRS CP2000 letter for unreported profits years later.

1099-K’s issued by using some exchanges document only the overall fee exchanged and fail to encompass right modifications for price foundation.

For example, if a user purchases $a hundred,000 of cryptocurrency and then sells it a month later for $90,000, then both the consumer and the IRS will receive a 1099-K form showing earnings obtained of $90,000. Form 1099-K is meant for users who generate profits on a platform, together with Ebay and Etsy sellers.

Most taxpayers efficiently don’t file the choices grossly inflated 1099-K amount as profits on their tax return. As a result, the choices IRS cross tests the choices 1099-K in opposition to the choices taxpayers earnings and then issues a CP2000 audit letter for failing to record the profits.

Worse yet, TaxBit has helped many taxpayers whose accountants weren’t aware that their customer’s 1099-K changed into erroneous and in fact suggested the quantity indexed on a taxpayer's 1099-K as earnings. It have to be referred to, maximum exchanges have ceased issuing 1099-K's for buying and selling hobby, as it is mistaken to document crypto trading proceeds as profits and consequently results in faulty IRS matching audits.

1099-B’s then again record cost basis when available and are designed to be transposed onto an IRS 8949. Gains suggested on an IRS 8949 are taxed pursuant to capital gains remedy instead of regular income. Many exchanges have already made the choices switch to 1099-B reporting, as it’s miles the accurate tax form and offers a higher person experience. This is leading to more correct tax reporting and will do away with the automated IRS audits despatched out to 1099-K recipients associated with unreported earnings.

More About TaxBit for Cryptocurrency Taxes

TaxBit automates the choices procedure of producing the choices essential tax bureaucracy for cryptocurrency buyers. After a taxpayer downloads their IRS 8949 tax form from within their TaxBit account, they can include the completed shape into their full tax return.

If a taxpayer is submitting their personal taxes then they can easily upload their IRS 8949 tax forms into a famous tax submitting software program along with TurboTax, TaxAct, or TaxSlayer. Alternatively, if the taxpayer uses an accountant to report their tax go back then they are able to offer their accountant with the choices finished IRS 8949 tax forms to have them integrated into their tax go back.

As a cryptocurrency tax software program based by using CPA’s and tax legal professionals, we believe in supporting taxpayers comply with their tax duties. To this stop, TaxBit’s Plus and Pro plans include all earlier year tax forms.

We have observed many cryptocurrency investors are simply now submitting their crypto taxes primarily based on the brand new cryptocurrency question on IRS Form 1040. Some customers want to amend previous year tax returns to account for his or her cryptocurrency hobby. TaxBit includes previous 12 months tax paperwork to lessen the choices burden of taxpayer’s backfiling to be retroactively tax compliant.

Cryptocurrency buyers by means of nature are protection and privacy oriented.

TaxBit uses “Read Only” API keys that do not supply get entry to to custody or buying and selling and we by no means promote or share our customers’ facts. TaxBit uses database servers hosted through AWS RDS. All statistics is encrypted the usage of AES 256 in transit and at rest.

TaxBit is SOC 2 Type 2 licensed and long past thru in-intensity safety opinions with a few of the most reliable cryptocurrency exchanges.

TaxBit is sponsored through and is the choices favored partner of many leading cryptocurrency exchanges.

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