The explosion of currencies and the crazy highs and lows that Bitcoin’s price made last year has left numerous enthusiasts and traders without a clue about reporting cryptocurrency on their taxes.
The information provided here dives into the specifics of reporting cryptocurrency transactions on taxes. If you are generally not aware of how cryptocurrency is currently treated by the IRS, it can be a good idea to read the cryptocurrency tax guide before you proceed.
If you are reading this, it means that you are probably a cryptocurrency enthusiast or trader that’s concerned with how to pay taxes on your trading activity. Perhaps you have an automated strategy for trading that makes hundreds of trades every month and you have started realizing that you do not have a way to calculate your actual tax liability. Perhaps you have lost money trading cryptocurrency and you now wish to claim those losses so that you can save as much money as possible on your tax bill.
You have probably made some trades no matter the situation and you now want to ensure that everything is reported legally on your taxes. How do you go about it?
Tax Accountants & Attorneys
Having worked in the crypto space for the last two years we have grown and learned to love our personal accountants over at Archer Tax Group. You always want to find a group of people who are not only willing to step up to bat for you, but also have a similar mindset and outlook on the entire ecosystem. This is important for a few reasons, one of which being, if you need help working through some of the more complex in and outs of the international business, operations in multiple countries and a confusing mess. Drew from the Archer Tax Group has a great team and is directed by a libertarian background who also wants to see the empowerment of the many and the models based around freedom for all. The family at Archer tax group is also giving free 15 minute consultations, they will drop in to see how they can help you save money on your taxes this year! Crypto can be hard, but let Archer Tax Group help you through the process. You can find them here ( //www.archertaxgroup.com/ ) . Follow through and let them know we sent you!
Step 1: Calculating Your Capital Gains or Losses
You need to know a few things for each trade you make, even if it is just a coin-to-coin trade. It is important to know the cost basis i.e. the cryptocurrency’s original value as well as the Fair Market Value of the cryptocurrency at the time you make the trade. If you are not familiar with the terms or even how they apply to cryptocurrency, please read the guide for a refresher on taxable events, capital gains, and everything to do with crypto-tax before you proceed. If you have done that, it is now time to move on.
Once you know both of these things, it will be much e
asier to calculate your capital gain. Just subtract the Cost Basis from the Fair Market value. Below is a quick example to help you make sense of it all.
Let’s assume that you have bought $100 worth of Bitcoin including brokerage and transaction fees. The $100 can buy about 0.01 Bitcoin at prevailing market rates. Now let’s assume that you decide to trade all your 0.1 Bitcoin for 0.16 Ether 2 months later. At the time of the trade assume that 0.1 Bitcoin had risen in value and was worth more than you bought it for originally at $160. Your Cost Basis here is $100 and the Fair Market Value is $160. It means that your capital gain on the trade is $60.
You are probably wondering how you are supposed to do that for all the trades you have made over the past year. The truth is that it could be an impossible do this if you don’t have a detailed spreadsheet of your trades. If you have been facing this problem, using CryptoTraderTax can save you a lot of time. The software calculates your capital gains liability within a few minutes and generates an exportable report to give the IRS.
What If You Lose Money Trading?
The process is exactly as described above. However, due to the way cryptocurrency is treated for tax purposes, it is possible to write off your losses. You can read the article on dealing with cryptocurrency loses for tax purposes here.
If you have calculated your capital gains and losses accurately, the next step is gathering the forms required by the IRS for reporting your capital gains. This is a great question and many are asking it, with so many ups and downs in the ecosystem, we are left wondering, how does this affect my final filling. Well, it's important to note, if you have acquired capital losses, you can write these off against your current tax structure. They guys at Archer tax group can do not only the United States, but they can file in Canada and the UK for you, They specialize in crypto taxes for people all around the world, and have been getting into managing many more business accounts as well as the personal bitcoin world that came into fruition lately.
Tips For Crypto Bookkeeping
With tax season nearly here, the rise of cryptocurrency can be a double-edged blade for people in the United States. Cryptocurrency boomed in 2017 and become a $400 billion industry. Naturally, this has drawn the eye of federal regulators and changes to tax law followed.
These changes, the Tax Curs and Jobs Act of 2017, excludes cryptocurrency to cryptocurrency trades from 1031 like-kind exchanges. This was a safe haven used by many traders to defer their taxable gains from their trades.
It is important that you keep up to date with the regulations and create a process that organizes all of the information related to your trading of cryptocurrency. Documentation and due diligence with accounting can be a safeguard which shows you were acting in line with the most recent compliance regulations. Of course, you will need to continue adjusting as the regulations are changed, but proper preparation can help.
Try Not to Mix Addresses
When you use cryptocurrency, you will be receiving and sending payments form a number of wallet addresses that you create when you need them. This can create a lot of problems for your accountant, particularly if you are not tracking each of the addresses meticulously. The problems can be compounded if you function as a business.
To make life easier for everyone, you need to limit your transactions to addresses that you have deemed as business-related. All of your personal addresses and expenses will need to be kept separately.
Of course, you will not want all of your records to be available in one public and neat address. However, you can limit the time and effort spent on keeping track of everything by bringing in new addresses on a schedule. You also need to engage with your finance team as soon as possible as they will be your best advisors.
Keep A Ledger Of Income And Expense
The reported fiat values in a transaction history for crypto will almost never tie up with the agreed fiat values. Knowing that this happens with blockchain technology is important, but you should not negate the significance of tracking. Record all of your transactions in your normal books as clearly as you can. You should also keep a running ledger that tracks all of your cryptocurrencies.
Each currency should have a ledger that tracks certain information such as the date, the name of the recipient or sender, the total amount of the coin and the value at the time of the transaction. The hash and some information about the kind of income, trade or expense that occurred should also be included. If you want to go a bit further, you can create a ledger for each of your addresses.
If you are keeping track of everything correctly, you should be able to easily track your losses and gains from paying your expenses using crypto or trading one cryptocurrency for a different one. As part of this, you will need to work with your accountant to choose your inventory theory. The options are FIFO which is first in, first out or LIFO which is first out. The theory you choose needs to be used for all transactions.
If you are not in the United States, the best option will be to stick with FIFO. Of course, continuity and consistency from one year to the next is important so you should not make this choice lightly. Talk to your financial advisors and find out which is the most appropriate for your circumstances.
Screenshot The Transactions
You will need to provide supplemental evidence of all transactions in receipt form. This will be the same as bank statements and credit card statements. The best way to do this for cryptocurrency is to take a screenshot of the transaction and record the hash in your ledger.
If you have any invoices from vendors, supporting emails and customer contracts, you should also include this. This is important for when outside parties need access to your records or if you have any changes in personnel.
Know Where The Money Comes From
You need to transact with other verifiable parties in good faith. You also need to use common sense and do not deal with any individuals or organizations who do not measure up. You also need to know that the public ledger is not enough. Your accountant does not want to have to scramble around to reinvent the financial wheel for your books.
Being proactive with your financial controls and bookkeeping is important. It is best to play by the rules and make sure you are ready for when the rules come into effect.
With all this in mind, depending on the complexity of your situation, we think that your best best is to Visit Archer Tax Group and let them know the Arcane Bear sent them your way! We are not affiliated. Just friends. They will be able to point you in the right direction and make sure your crypto filing this year is as easy as it can be!