Industry News The Possibility of US Taxation of Cryptocurrency Users

The Possibility of US Taxation of Cryptocurrency Users

April 10, 2018

The bull run that overtook the cryptomarket in 2017 was an incredible sight. However, in 2018, the markets are steadily in the bearish territory and for the US crypto investors, there is a looming chance of taxation. While cryptocurrency like bitcoin is used daily for things like purchases, investment, and online betting, it has been so far a murky domain of taxation.

With the tax season being in full swing, there are more questions that there are any viable answers. The investors and holders of cryptocurrency are definitely worried – the search volume for “bitcoin tax” has risen sharply in recent weeks.

Currently, the IRS seems to be focusing on the new tax laws but there has been no additional tax guidance on cryptocurrency for almost four years. That is why today, investors mostly do not understand how to calculate taxes on their crypto gains in 2017. Here is the overview of the problem and potential ways it can be dealt with in the most painless manner.

Confusing Times

Mark Steber, the CPA and Chief Tax Officer at Jackson Hewitt believe these are confusing times. He thinks that the issue of taxing the cryptocurrency gain is generating that confusion and for a good reason. The changes that are coming in the laws provide a lag for the growth of cryptocurrencies. Now, it is not always clear when a realized gain the crypto domain is a taxable income as it was defined by the IRS.

However, there is a certainty that no one is actually benefiting from that, even though many might think that the owners of crypto assets would want to avoid taxes. The truth is that practically everyone is worried that the taxation could be a lot more damaging if done abruptly and by an undefined process.

That is the reason why so many investors and experts are determined to shed some light on the process of taxation. This way, anyone will be better able to navigate the challenging waters that are certainly up ahead at some point in the States.

Defining Losses and Gains

The first point is that taxable losses and gains come from the moment when the investor sells cryptocurrency. For example, if a person bought two BTC for $4,000 and sold one for $14,000 later on, the taxable gain is about $10,000.

If the coin was held for 12 months or less, it is taxed as an ordinary income. Also, the funds in USD do not have to be withdrawn for them to be taxable. If they are located in a wallet that is registered as a US-based entity (the user did not register from abroad) they are still taxable.

The same goes for exchanging a single or more cryptocurrency coin for other ones. The transfer does not have to be cryptocurrency to fiat, but crypto to crypto as well – these are also taxable.

A general tip for any taxation process is to have a document about the transaction so that it can be accounted for on the tax day. Aside from that, there are many more unknowns that clear elements that the investor can prepare for.

Developing a Strategy

Even in uncertain situations like the cryptocurrency taxation, cryptocurrency investors should prepare their strategy. It should consist of three key factors. Firstly, the IRS will at some point in the future provide new guidance on the process of cryptocurrency taxation. Secondly, the rules they come up with can be enforced retroactively.

Finally, the IRS audits are able to go back 36 months or cover a period of the previous three years. An investor that is making a decision today might find it very problematic in the future. Those who fail to report 2017 might find it coming back to hurt them later on.

Smart money says that it is only a matter of time before crypto brokerages, as well as the exchanges, start reporting in the same way as their traditional counterparts. Coinbase was asked for the information on about 13,000 of its users, making it only about 0.1% of their entire base. Yet, this is very likely sign of the things that will come for US residents who employ the US brokerages.

Those who under-report the previous year might end up with monetary damages or even worse in the future. The minimum damage could be penalties, interests and back taxes. Those who under-report severely their gains could end up with criminal charges related to tax evasion. In both of these cases, ignorance will not be seen as a valid excuse.

This is the reason why Steber like many other, suggest talking to tax professionals who are adept with issuer related to cryptocurrency. The same should be a valid advice throughout the year, not just shortly before filing taxes.

The To-Do List for Crypto Taxes

There are a number of new platforms and tools used to help individuals calculate their gains for the previous years. Like with online marketing, eSports, and many other digital ventures, these can greatly aid the process. However, regardless of the quality of the same tools, it is the data that the user enters which will determine how good their tax returns are.

This is why everyone takes the following steps. They should include all of the relevant data from their exchanges and digital wallets, but firstly review all of their transactions. These should include gifts, transfers, payment, and donations. Also, some calculations should be spot checked to verify they are correct. Finally, a person should lastly talk to a tax expert and make sure they are not missing something crucial.

There is still plenty of time. Residents are allowed by the IRS to request a tax extension and get up to six months of leeway time. It is safe to assume that many will go for that option but the IRS staff is used to the same possibility. Because of this, no one should risk filling the tax documents in a faulty manner and instead simply ask for more time if they think they need it.

Source: CoinDesk