Cryptocurrency may know no boundaries, but the tax man does.
After a rocky year in the blockchain market, many investors need to know how to handle this year’s taxes. Both gains and losses will have a profound impact on your tax situation. Like any investment property, handling this well can save you a lot of money.
Doing it badly can cost you just as much.
Here are four tips to help plan your 2019 taxes.
Claim. Your. Gains.
With assets from and held all over the world, it is easy to think of blockchain investments as beyond any national scope. This is wrong.
The IRS views all blockchain assets, including cryptocurrency, as property for the purposes of taxes. They do not view it as trading currencies. This means that all blockchain trading falls under the capital gains tax laws. When you sell a blockchain asset, you owe taxes on every dollar made from the sale.
It does not matter where you made the trades or in what currency. If you are a U.S. citizen, you will owe taxes. Don’t ignore that.
Offset Losses
According to NODE40, a firm that specializes in blockchain accounting, the IRS can expect a flood of new blockchain filings this year. It won’t be hard to beat the numbers from the past few years; in 2013 – 2015 alone, less than 1,000 taxpayers filed their blockchain gains and losses. With the blockchain market down approximately 80 percent, though, many investors may be ready to start claiming losses on this year’s taxes.
This can be a very smart move.
Since the IRS views blockchain trades as a capital gains transaction, you can use any investment gains elsewhere to offset losses in your blockchain portfolio. So, for example, say you took a $1,000 loss on bitcoin but made $1,000 in profit on a stock sale. Both are capital transactions, so you can offset your taxable income from the stock sale with your losses on bitcoins. Your total taxable capital gains position will be $0.
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Keep Capital Gains Separate From Income
Capital gains and personal income have different taxable statuses.
Each has different brackets. Make sure to track that, as your tax rate for blockchain income may be less than your tax rate for earned income.
Further, you can deduct up to $3,000 in net capital loss from your earned income. A net capital loss means that your total position on all capital gains was a loss. So, if you took a bath in the blockchain market this year, you can take an income tax deduction up to this $3,000 cap.
If your losses exceeded $3,000 you may roll the remainder forward to next year.
Track Taxable Events
“There is a lot for individuals to consider when it comes to crypto accounting and their tax returns,” said Sean Ryan, Co-Founder of NODE40. “For example, ‘hodlers’ will have a completely different set of circumstances to traders, while those receiving crypto from forks and then selling will also have a unique situation to deal with.”
Capital gains taxes are built around what’s called “taxable events.” A taxable event is triggered, essentially, whenever you see profit or loss from an asset. For blockchain, this generally means whenever you sell your tokens. (It’s more complicated than that, but this will do for our purposes.)
Track each and every transaction carefully because it can have a substantial impact on your tax position. Whether you hold an asset for less than a year or more than a year can change your tax rates, for example, and your profits and losses add up cumulatively. If you took a loss in March and bought into a new asset, you can deduct that loss from your total capital gains position at the end of the year…but only if you tracked it.
Choose Your Cost Basis
Cost basis is the original value of your asset for tax purposes. Since your final position will be based on sale price compared to the original value, this can change your tax position significantly.
“The key,” said Eric Solis, founder and CEO of the financial technology firm MovoCash, “is to understand that there are different methods for determining cost basis.”
“For example,” he said, “you can use first in, first out (FIFO) or last in first out (LIFO) or you can use the average method, which means that you take all of the bitcoin that you own, add up the total cost, and then divide the number of units into the total cost. This becomes your average cost basis irrespective of the actual price you paid. You would then subtract the sales price from your average price to determine your gain or loss.”
“Using the right method can save you a lot of money in taxes, but it’s important to realize that once you select a methodology, you will be committing to that method for the life of the asset.”
While the full details of cost basis are beyond the scope of this article, readers can find more on the subject here. It’s worth understanding.
Once your tax issues are sorted, it’s time to learn more about investment. Subscribe to the Bitcoin Market Journal newsletter today!
