Crypto Tax Tips To Start 2018 Right

Even though cryptocurrencies are getting more and more exposure, their legislation seems to be a grey area for most governments, especially when it comes to declaring your income in digital currencies. The Internal Revenue Service, the US tax collection agency, has issued Notice 2014-21 stating that Bitcoin and altcoins are subjects to federal income and payroll taxes. So what to do with your crypto money and how to declare your taxes right?


Let’s start with the dreary subject of records. Yes, that applies to crypto investors too. You’d better have some if you are thinking about taxes. If you’ve ever tried to tell the IRS “I lost my receipt,” you don’t want to do it a second time.

The IRS has heard every excuse in the book. While it is not without sympathy, you’ll find it far easier not having to go to the additional effort of proving something by another means. Periodically, the IRS issues reminders to taxpayers regarding the importance of safeguarding your tax records.

That’s especially true in cases of natural disasters that make traditional record-keeping go haywire. But think of it year-round wherever you are. The IRS suggests creating a backup set of records stored away from the originals. It is good advice for crypto investors.

Selling some assets?

If you are sitting on some big gains, you might consider how your tax picture will look for the entire year. It isn’t too soon to start thinking this way. In fact, try to do it long before year-end so you can make adjustments. You might want to sell or hedge some, even if you think the market is still headed up.

There is a lot more than taxes involved in such decisions. But it can be wise to at least think about it. For example, what if your tax year already has a big capital loss in it, or you have a big carryover loss from prior years? In general, unused capital losses can be used to absorb up to $3,000 per year in ordinary income.

But unless you have capital gains to offset your capital losses that $3,000 would be the extent of your tax benefit. Some people sit for years and years with unused capital losses that carryover each year. So, if you also have unrealized capital gains, you might consider selling some gain assets, to be able to absorb your losses. Run some numbers and see how it looks.

And what exactly are you selling?

Another topic as tax time nears is to ask whether you really know what you are selling. That is, if you have 100 Bitcoins and you sell 10, which 10 did you sell? There is no perfect answer to this question. Most of the tax law considers shares of stock, not cryptocurrency.

However, many advisers think that the same kinds of rules should be applied in the case of multiple crypto assets that you hold. If so, specific identification of what you are selling, when you bought it, and for what purchase price, is likely to be the cleanest. But that may not be possible.

Some people use an averaging convention, where you essentially average your cost across a number of purchases. Consistency and record-keeping are important. You don’t want the IRS to claim that you denied the government its fair share of each sale. And remember, if you are claiming long-term capital gain treatment, being able to prove that you held the cryptocurrency for more than a year before selling is key…

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