How To File Cryptotaxes This Year

by Emily on March 1, 2020

in Articles, Cryptocurrency

The International Revenue Service set the US Tax Season 2020 in motion starting on Jan. 27, for individual tax returns. This new year also brings many culminating developments in cryptocurrency taxation with strengthened investigative efforts. 

According to a Notice published by the IRS, the general principles of taxation will apply the same for virtual currency transactions, as it is for any other type of property. The last date for filing the 2019 tax returns is April 15, 2020. 

What are Cryptocurrency Taxes?

Cryptocurrency is a virtual and decentralized payment gateway, of which the user can make financial transactions anonymously. This layer of security and anonymity created a boon for the underground economy. Since transactions are hard to track, it has been a big challenge for regulatory bodies to develop formidable cryptocurrency taxes, which was the reason why crypto transactions were non-taxable events until 2018. 

For many years, cryptocurrency created a cult following due to having no taxes imposed on it. This is no longer the case, as authorities like the IRS are catching up with the new technology and categorizing cryptocurrency under the existing taxation laws. 

A Revenue Guide and FAQ page released by the IRS, states that virtual currency will be treated as a type of property by the US Government. Anyone who has possessed cryptocurrencies like Bitcoin, Etherium, or Zcash, would have to pay taxes according to the general tax principles levied as long-term or short-term capital gains for the purchase or exchange of goods or services using the currency anyhow. It would appear more like stocks. 

As of now, the federal income tax rate for cryptocurrencies looks like:

  • Minimum 15 percent Tax, applicable on any cryptocurrency gains, with a holding period of 365 days.
  • Short-term tax rates apply based on the holding any less than 365 days.
  • The tax rate can go upwards to 20 percent for individuals with a net income of at least $425,800 and $479,000 for married couples.
  • A tax rate of zero percent applies to individuals with a taxable income of $78,750.

How Is Cryptocurrency Taxed?

Long term investors may be delighted to know that crypto-assets get a little extra love concerning taxes, in comparison to other investment alternatives like gold, currency, or real estate. 

When you sell any cryptocurrency after possessing it for over 365 days, capital gains or losses are the difference between the sale price and adjusted basis value. Whereas, when you exchange the same, capital gains or losses are equal to the variation between fair market value and adjusted basis value. Airdrop cryptocurrencies will be treated as ordinary income and calculated under a “matching basis.” 

So whether you sell or exchange your crypto assets, according to general federal tax guidelines, you will have to pay cryptocurrency taxes for short term capital if you hold the currency for less than one year. In the case of long-term capital, which levies after a period of over 365 days, the tax rates will reduce, depending on the holding period.

Generally, taxpayers are liable to pay the cost basis of a token or coin. The adjusted basis applies to specific acquisition costs, such as any transaction fees or purchase-related commissions. In the account of initial coin offering, taxpayers can obtain security tokens or utility tokens, based on acquisition cost. 

Bitcoin Miners are also liable to pay taxes on income or earning rewards above $400 from mining, within a year. 

Though there is little data about the methods used by the IRS to track the cost basis of cryptocurrency transactions, the general guideline goes like this: All taxpayers must report their cryptocurrency transactions, on Form 8949 and Form 1040, Schedule D, consistently stating the cost basis or adjusted basis and other transaction details. It would be unwise to try and withhold information from the IRS. 

How to File Cryptocurrency Taxes

The form 8949 applies for the reporting of Sales and Other Dispositions of Capital Assets. You can find it on the IRS website. In the form, you need to describe all details of transactions using capital assets (including cryptocurrency). The information includes:

  • Description of Property
  • Date of Acquisition 
  • Date of Sale
  • Sale Price 
  • Cost Basis
  • Adjustment Basis 
  • The Net Gain or Loss 

If you hold your crypto assets for less than a year, refer to the Short-Term section at the beginning of the form, and if you held it for more than 365 days, scroll down to the Long-Term section. 

Form 1040: Schedule D

When having a gain or loss under the long-term scale, taxpayers are subjected to a tax reduction on capital gain or loss, depending on their gross income. In order to have accurate calculations of the deducted tax amount, taxpayers need to have Form 1040 in place, which they can use to report both the short-term and long-term gains and losses, as net capital gain or loss. 

Schedule D is the extension of the total report, where you can summarize any special transactions, such as carry forward of crypto losses, specifications of short-term gain/losses, or other capital asset transactions. While reporting, you first need to fill the Form 8949 and then use Schedule to transfer all the information about amounts and complete the process. 

How to Avoid Large Paybacks

  • Invest when the price goes down, sell when the price is high.
  • Stop short on selling when your income is high, and give some scope to long-term net gain or loss, where you can enjoy reduced rates on a tax bracket. 
  • Keep track of utility expenses used while mining, such as electricity, equipment costs, and other billable resources; these expenses are eligible for tax exemption.
  • Consider having a reliable Tax Advisor in place.

The IRS Focuses On More Ways To Broaden It’s Crypto Assets Tax Guidelines

With the advances of the cryptocurrency tax investigation, transactions may not be so cryptical anymore; it is better to get down to business and file for taxes. There are indeed certain gaps felt in the latest IRS Guidelines, but the Bureau is putting immense efforts to make things easier for all. As of now, even if you held any cryptocurrency of over $400, it is high-time you to start filing for taxes if you haven’t already. 

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Muhammad Ibrahim March 27, 2020 at 16:55

I think this year 2020 is the worst year for cryptocurrencies and people will not able to get profit so no tex will be deposited to the Government.

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