Cryptocurrency taxes can be super complex
This article is a collection of useful information we have gathered in preparing for this stressful tax season. We are building www.ZenLedger.io, a tax tool for cryptocurrency investors and CPAs to automate as much of this complex process for you as we can.
File a Tax Extension Now
As the crypto markets have been nuts and your transactions are probably on many exchanges with many different reporting formats, you may want to file an extension so that you can file your taxes on Oct 15, 2018 instead of Apr 17, 2018- this year’s tax filing day.
Remember that filing an extension does not mean you don’t have to pay the taxes you owe on April 17, 2018. It means you don’t have to send in a tax filing in case you need more time to sort out all your finances from 2017. However, you still have to pay an estimate of what you think you owe. Here are the IRS penalties, for not filing or not paying what you owe. If you have questions here, consult a CPA or tax professional.
You can use the ZenLedger.io crypto tax tool now for free to help you file your taxes or your extension (IRS tax extension). Here’s the process:
- Either by hand or using a tax tool such as ZenLedger.io, you or your tax profession will need to figure out the capital gains/losses for your crypto trades across all exchanges and wallets you used. Put this number into your total capital gains as you consider your other financial assets such as stocks and bonds.
- Send the IRS a check for the estimated amount.
- Fill out Form 4868 online or mail in a paper copy with a registered postmarked date….just to be safe.
1031 Exchange
Be careful if you are going to try and classify past cryptocurrency transactions as 1031 “like in kind” non-taxable exchanges. This treatment is most often used by home buyers to buy a new house without paying capital gains on their old house that they just sold. While stocks, bonds or notes, and other securities or evidence of indebtedness/interest are specifically excluded from the 1031 definition of eligible property, commodities such as gold, silver, and art are eligible (at least prior to 2018).
There isn’t clear guidance here from the IRS so you are free to make your own risk decisions. Just make sure you consult a tax professional and/or a lawyer.
Mark to Market, Coin to Coin Transactions
As you make coin to coin trades that never get a dollar value put on them, you will need to value the dollar value of the coin you sold at the time and the dollar value of the cost basis that you are selling at. This can be a highly manual process if you don’t use software.
Non-Taxable Transaction vs. Taxable Sales
Make sure that as you move crypto from one exchange to another or on and off your cold wallet that you are correctly classifying these movements. If you simply move 1 BTC from Coinbase to Bittrex to your wallet to Binance back to Coinbase- those were all non-taxable transfers and you maintain your cost basis in that 1 BTC throughout. Some exchanges may erroneously make these movements as a taxable event. Make sure you catch these as it could lower your tax burden significantly.
FinCen 114, FBAR
If you have over $10,000 in a foreign exchange, make sure you are correctly documenting this and filing a FinCen 114 and FBAR. Our software does this for you automatically. FinCen is the agency that cares about about anti-money laundering, so tread lightly.
https://www.fincen.gov/report-foreign-bank-and-financial-accounts
Short/Long Term Capital Gains, Trading Fees
Charlie Minard, CPA, of CryptoCPAs.com has some advice.
Short-term: If you hold a cryptocurrency for less than a year before either trading it for another cryptocurrency or back into fiat, it is considered a short-term gain or loss.
Long-term: If you hold a cryptocurrency for more than a year before either trading it for another cryptocurrency or back into fiat, it is considered a long-term gain or loss. The most conservative and common accounting method for handling cryptocurrency trades is the FIFO (First-in, First-out) method.
To calculate your basis in your crypto-assets, you add any related fees and commissions to the purchase price to arrive at the basis. These values should be included in the exportable csv files from your exchange. Any transaction fees incurred when sending cryptocurrencies between wallets could be considered investment expenses and would be deductible in 2017 on Schedule A as an itemized deduction. However, if instead of owning the crypto-assets individually, your business owns the cryptocurrency investments, you instead deduct these investment related fees on Schedule C (or the entity return).
LIFO for Potential Tax Savings
Andrew Gordon, JD, of the Gordon Law Group, has some advice.
Some taxpayers my find a benefit in using LIFO to account for their taxable gains in 2017. LIFO, or last-in-last-out, is a method to determine which cryptocurrencies out of your holdings you are selling. In periods where the price of crypto is appreciating (such as much of 2017), using LIFO would minimize your gains in the current year. However, in future years you will recover larger gains, as you sell more of your low cost basis holdings. LIFO remains a “gray area” of crypto taxation because it requires the taxpayer to be able to “adequately identify” the crypto you are selling. Meaning, you need to be able to select or identify the specific crypto you want to sell among your holdings. If you hold your crypto in separate wallets, this may be possible, but it would be difficult to argue for taxpayers who use a single wallet or exchange.
ZenLedger tax tool
Using www.ZenLedger.io can help you and your CPA do a lot of this highly manual, time consuming, and complex work for you. We can import your trades and automatically generate the tax forms you will need to file your taxes. Save yourself some stress and hassle this tax season.
Special thanks to Charlie Minard and Andrew Perlin who are CPAs and cryptocurrency enthusiasts. They founded Crypto CPAs to help clients understand all cryptocurrency tax implications and work to take the uncertainty out of U.S. taxes. https://www.cryptocpas.com/about/
Special thanks to Andrew Gordon who is helping clients with the thorny legal and tax issues of creating legal entities and conforming to regulations. https://www.gordonlawltd.com