It’s been famously said that the only two certainties in life are death and taxes. For many of us, the only thing spookier than preparing your own funeral arrangements, is preparing your own taxes – especially if you’re in crypto. That’s why it might be a good idea to partner with crypto tax experts heading into the end of the year.
"In 2017, which was a very high-growth year for cryptocurrencies, prices went up tremendously and then dropped significantly in 2018. I saw taxpayers that had massive taxable gains in 2017 and then lost their entire portfolio the next year. Now the IRS is calling, and those individuals still must pay taxes on those earlier gains, but they don't have the funds. Proper planning and tax optimization services can help prevent that,"
according to Justin Woodward (NASDAQ:), a tax attorney who specializes in digital assets and is the co-founder of TaxBit.
TaxBit has offered a comprehensive tax solution for cryptocurrencies for the past few years. It’s great solution that connects directly to the crypto exchange you use and does all the transaction tracking and using smart programming to identify taxable transactions.
This week TaxBit launched its corporate suite of crypto tax solutions. And to make your personal taxes less scary, Wooward offers these five cryptocurrency tax tips to help plan for current and future tax seasons:
The IRS currently classifies cryptocurrencies as “property” not securities. As such, that asset class is taxed at the short- or long-term capital gains rate depending on how long you’ve held an asset. “If you hold a cryptocurrency for a year or less, the short-term tax rate for 2020 ranges from 10 to 37 percent depending on income and filing status. If you hold a digital asset for longer than a year the long-term tax rate applies, ranging from zero to 20 percent on profits,” said Woodward.
Another important consideration is understanding that you’re not taxed only when you convert your cryptocurrencies back into fiat currencies such as dollars or euros. “Taxable events can occur even if you swap a crypto asset for another token including stable coins such as USDC or DAI. A key determinate of the taxable amount for each transaction will depend on your initial cost basis, which was how much you initially paid for each respective token versus its price at disposition when you sold or converted into something else,” he said.
Woodward also noted that as with most assets, initially acquiring any given digital token is not usually a taxable event, neither is moving tokens to a different crypto exchange such as Coinbase (NASDAQ:) or a digital wallet; however, disposition of a token at a loss or profit is a taxable event in most circumstances. “Also, if someone sends you a digital asset in exchange for a product or service or you earn interest in the form of a cryptocurrency those are taxable the same way interest earned on traditional securities would be taxed,” he noted.
When it comes to tax minimization tactics, cryptocurrencies can be excellent tools to easily “harvest losses” if you’re a high-income earner looking for some write-offs. Volatility is an inherent attribute of cryptocurrencies and smart investors can use that to their benefit. When wide swings happen, it’s extremely wise to take a loss if you can. “Say you have one that drops $5,000 in a day. You can legally exchange that for a stable coin or any other cryptocurrency and then immediately buy back that same Bitcoin within minutes. There is no repurchase waiting period as with other securities. This is a tremendous way to intentionally harvest losses by documenting the initial loss while also lowering your cost basis on the repurchase.”
Lastly, and perhaps most importantly, tracking the tax impact of your cryptocurrency trades can be easier and safer than you think. Linking the exchanges where you make transactions and crypto wallets to some of the newer crypto-focused tax tracking software can fully automate the process for both individual investors and businesses — even for transactions dating back to 2014. Woodward noted that under recent tax changes, past losses can be carried forward indefinitely until they are fully claimed.On The Flipside
- If this upcoming tax season is your first year dealing with the tax implications for cryptocurrencies, it’s best to seek expert help by contacting a tax preparer or accountant with experience in digital assets – but don’t wait.
- Many people mistakenly believe that taxes are completed only once a year, but it requires vigilance all year long especially when you’re invested in cryptocurrencies.
Why You Should Care?
During testimony before the Senate Finance Committee earlier this year, IRS Commissioner Charles Rettig stated that the U.S. government fails to collect as much as $1 trillion in revenue every year due in part to recent exponential growth and interest in cryptocurrencies.
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