How Taxes On Cryptocurrencies Like Bitcoin Work

The large majority of Bitcoin investors haven’t paid taxes to the IRS. In fact, the IRS found that only 802 people using Coinbase, a cryptocurrency broker, filed form 8949 for 2015 for activity related to Bitcoin.A popular tactic has been exploitation of 1031 exchanges. A 1031 exchange lets investors exchange one property for another of like kind. For example, you might exchange your Bitcoin for Litecoin, avoiding taxes through the 1031 exchange.Evan Fox, a tax manager at New York accounting firm Berdon, said, ”Some people think, ‘I’m taking my bitcoin, which the IRS has deemed to be property, swapping it for another property and doing it for investment reasons,’ so it sounds like it could be a 1031 exchange. I think it’s a stretch.”As we’ll see, the IRS has caught on this tactic.The new tax bill closes the 1031 loophole. Suzanne Walsh, a partner at the law firm Murtha Cullina, mentioned to Fortune magazine, “The tax act in Sec. 13303 amends IRC Section 1031 (a)(1) to delete “property” and replace it with “real property” …So, you can see that now I can no longer take the position that my Bitcoin to Litecoin exchange was a like kind one under Sec. 1031, and I have to recognize the gain when I do it.”The IRS has effectively taken away any chance that cryptocurrencies can be classified as property for tax reporting purposes. Instead, they are now an investment and treated as such for tax reporting.1031 exchanges are now mostly restricted to real estate transactions.Now that Bitcoin and other cryptocurrency transactions must be reported for tax purposes, cryptocurrency investors have a new issue on their hands.How do you manage all of those cryptocurrency transactions for tax reporting?Most investors don’t have detailed transactions records for one cryptocurrency that shows their gains and losses, much less records for all of the other cryptocurrencies they are trading in. After all, it’s common to trade out of Bitcoin into other currencies such as Litecoin or even Bitcoin Cash.The reason reporting is so difficult is because cryptocurrency investors don’t receive 1099 forms. At least not yet.1099 forms are sent out by brokerages and show a summary of gains and losses for investments. These forms are sent to clients and the IRS.Lacking a 1099, investors must now keep track of all their transactions and run all their gains and loss calculations.The IRS will certainly be doing the same and has special software to keep up with it all.Third party services are starting to come online to help cryptocurrency investors. One such service is Bitcoin Taxes, created in 2013. The service can track transactions for all cryptocurrencies. Bitcoin Taxes describes the process as simply three steps:Bitcoin Taxes has helped clients in the U.S., Canada, UK, Australia, Germany and other countries.Additionally, a tax professional can also help with cryptocurrency tax-related issues.Long-term and short-term gains still apply to cryptocurrencies. Remember, they are treated similarly to stock investments.For cryptocurrencies you’ve held for one year or less, gains are treated as short-term. This means you’ll pay your regular income tax rate on those gains.For cryptocurrencies held for more than a year, gains are treated as long-term. These gains are taxed at lower rates. Rates range from 0% to 20%, with 20% applying to high-income earners.ConclusionWhile tax reporting use to be fairly loose when it comes to cryptocurrencies, that is no longer the case.Going forward with the new tax bill, everyone will be expected to pay taxes on cryptocurrency gains, just like they do for gains on stocks.Lacking 1099s, investors will be expected to self-report to the IRS. If you are going to trade cryptocurrencies, it’s best to find some software that can track the details of your transactions.Trying to put them together after the fact at the end of the year will be almost like a mission impossible.There is software available to help with the task of tracking cryptocurrency transactions. We have not used such software and can’t comment on their reliability.An alternative is to use a tax professional. Although it could cost far more than using software.

Written by Investors Wallets

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