Cryptocurrency FAQ

 

Cryptocurrency / virtual currency tax reporting – FAQ

We are seeing a lot more of our clients with virtual currency transactions recently, so we’ve put together this FAQ to assist with tax reporting of these transactions.

 

All I did was buy cryptos, do I need to report anything?

Yes. Your tax return includes reporting that you own any virtual currency (there’s a Yes/No box to check on the front page of the tax return).

Purchasing a virtual currency is not a taxable transaction, but if you purchased one currency and then transferred it to a different currency, the IRS treats this as selling the first to purchase the second.  And any sale is a taxable event.

 

What transactions do I need to report?

  • Sale of virtual currency
  • Purchase of products or services with virtual currency
  • Trade virtual currency for other products
  • Receive virtual currency as payment for services
  • Transfer of virtual currency from one type of currency to another
  • Receipt of new cryptocurrency after your existing cryptocurrency went through a hard fork followed by an airdrop
  • Virtual currency received as a result of mining

 

What transactions are not reported?

  • Purchase of virtual currency with cash
  • Transfer of a virtual currency from one wallet to another (without changing the currency type)
  • When a soft fork occurs with existing virtual currency
  • When a hard fork occurs but you do not receive new currency afterward

 

How do I report my virtual currency transactions?

Virtual currency can be reported as self-employment income, ordinary income, or investment income (capital gains/loss).

Virtual currency received as a result of mining or in exchange for services provided is treated as self-employment income (generally reported on a Schedule C).  It is reported at the market value on the date it is received.  This also become your acquisition cost for future capital gains reporting.

Virtual currency received through a hard fork or airdrop is treated as ordinary income (generally reported as “other income” on the Form 1040).  It is reported at the market value on the date it is received.  This also become your acquisition cost for future capital gains reporting.

Most other virtual currency transactions are considered sale of property and reported on Schedule D, taxed as capital gains income.  These transactions are reported like buying & selling stocks or other financial assets and any increase is value is taxed as a capital gain and losses are deductible (with limits).

 

If you are preparing my tax return, what information do you need from me to report my virtual currency transactions?

To report your virtual currency transactions, we need a listing of each transaction showing the following:

  • The date of acquisition
  • Cost/value at the date of acquisition
  • The date of sale/transfer
  • Cost/value at the date of sale/transfer
  • Capital gain or loss amount

 

For example, imagine the following set of (fictitious) facts:

1/1/18 purchased $1,000 worth of Bitcoin (valued $13,500 per coin = 0.074 Bitcoin received)

6/1/18 traded half of that bitcoin for Ethereum  (Bitcoin valued at $7,500 so 0.074 Bitcoin valued at $555, half of which is traded ($277).  Ethereum valued at $577 per coin = 0.480 Ethereum)

10/30/18 sold the other half of the Bitcoin for $229 (valued $6,200 per coin and 0.037 Bitcoin sold)

10/30/19 sold the Ethereum for $92 (valued $192 per coin and 0.480 Ethereum sold)

 

Most virtual currency wallets will provide a list of transactions with the transaction market value, but they do not report your purchase date or acquisition cost.  The transactions in the example above would show in a virtual currency transaction list as follows:

1/1/8 buy 0.074 Bitcoin $1,000

6/1/18 trade 0.037 Bitcoin for 0.480 Ethereum

10/30/18 sell .0.037 Bitcoin $229

10/30/19 sell 0.480 Ethereum $92

 

These same transactions would show on a tax return Schedule D as follows:

6/1/18 sale date Bitcoin – sales price $277, purchase date 1/1/18 – cost $500 – capital loss $223

10/30/18 sale date Bitcoin – sales price $229, purchase date 1/1/18 – cost $500 – capital loss $271

10/30/19 sale date Ethereum – sales price $92, purchase date 6/1/18 – cost $277 – capital loss $185

 

As you can see, the wallet transaction list is incomplete for tax reporting.  Also note that this is a very simple example – imagine 25 different purchases of Bitcoin, 12 exchanges between different 4 different virtual currencies, and 8 currency sales.  The tracking for tax purposes gets complex quickly!

 

You have three options of how to organize your virtual currency transactions, to bridge the gap between the wallet transaction list and the full tax reporting details:

  • Use a third-party services that will connect to your wallet data to create tax reports. A few examples of these are cointracking.info, cointracker.io, bitcoin.tax and essentials.lukka.tech
  • Create a spreadsheet and calculate your tax info yourself.
  • Hire a bookkeeper or accountant who understands the taxation of virtual currency to create a spreadsheet to calculate your tax info for you.

 

How important is this really?  I’m not buying/trading/selling that much.

The IRS is taking the stance that not reporting your virtual currency transactions is tax fraud.  In other words, they are not treating it as an honest error that is fixable and possibly subject to penalties.  Instead, they are treating it as criminal activity and intentional tax evasion.

They will not accept the excuse of not knowing the tax rules.  They are taking it very seriously and putting a lot of resources into cracking down on non-reporters.  The consequences of not reporting can be very severe, including $250,000 fine and up to 3 years in prison.