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Whether you are new to crypto or have experience filing your crypto taxes, here are 5 very important things to note for your 2018 tax filings.
1. Cryptocurrencies are capital assets and profits are recognized as capital gains
For each taxable crypto event, a calculation must be made to determine whether you have a capital gain or loss to recognize. These gains/losses are reported on your tax forms.
These taxable events include:
Selling crypto for fiat currency (i.e. USD)
Trading BTC for ALTs or ALTs for BTC
Using crypto to buy goods or services
Receiving crypto due to a fork or as a result of mining
2. Losses can be used to offset gains and to reduce taxes
If your crypto activity results in a net loss for the tax year, you can use that loss to deduct up to $3,000 against your taxable income. If your losses are in excess of the $3,000 that can be deducted against your taxable income, the excess losses will be carried forward to the next year.
The losses that have been built up can be used to reduce capital gains from the subsequent year as well as up to another $3,000 against the following years taxable income. This will continue in perpetuity until the losses are all used up.
A Simplified Example:
2018: $10,000 in capital losses. $3,000 are used to reduce taxable income. Thus, there is a $7,000 capital loss carryover.
2019: $5,000 capital gain. The $7,000 capital loss carryover will be used to wipe out the $5,000 capital gain. In addition, the left over $2,000 will be used to reduce taxable income in 2019. There are now no capital losses to carry forward to 2020.
3. Keep accurate records!
As we have seen over the past couple of weeks, exchanges go offline and users have no way to access their records. All taxpayers should constantly download their data as frequently as possible to make sure that they have adequate records.
Keep records of all your cryptocurrency activity, not just trading activity occurring on exchanges.
Periodically download your trading history from any exchanges you use.
Ensure you have a record keeping procedure to document all of your crypto spends
4. Transfers from wallet to wallet and gifts do not create a taxable event
When crypto is transferred between wallets or exchange accounts that are owned by the taxpayer, a taxable event has not occurred. However, mining or withdrawal fees can be used as an addition to the asset’s basis or a deduction from the proceeds that are eventually realized.
A gift does not create a taxable event for the recipient. However, gifted crypto that is subsequently sold will create a taxable event. When you are gifted crypto, you receive a carry-over basis from the person who gifted you the asset. This means when someone gifts you crypto get their cost basis information from them! Additionally, the recipient of the gift receives the donor’s holding period in the property for determining whether a gain is classified as long term or short term.
You are gifted 1 BTC in October 2018 from your friend who purchased the BTC for $2,000 in May 2017.
Your basis in the asset will be $2,000 and it will have a long term holding period.
5. 1099-Ks don’t necessarily reflect your crypto income for the year
If you receive a 1099-K for your crypto activity do not panic! Exchanges are required to send you a 1099-K if your activity exceeds $20,000 or you have over 200 transactions.
The amount that is reported on your 1099-K will not necessarily indicate the amount of gains or losses that need to be reported to the IRS on your tax returns.