2018 was a difficult year for cryptocurrencies. With the total market capitalization of all cryptos falling from over $800 billion to just over $100 billion in the space of a year, many enthusiasts and traders are now filing losses on their 2018 tax returns. This article addresses what we learned about the treatment of cryptocurrency for tax purposes, including TurboTax’s involvement in the cryptocurrency space.
Here are last years’ biggest lessons:
Crypto Trades Are Taxable Events
Until the end of 2017, there was a gray area around whether or not the 1031 like-kind exchange law could be applied to cryptocurrency. Many tax professionals were using it to defer capital gains. However with the Tax Cuts and Jobs Act going into effect at the beginning of 2018, it is now clear that cryptocurrency does not fall within the parameters of like-kind exchanges.
This means that crypto-to-crypto trades, for example trading Ethereum for Bitcoin, are considered taxable events, which must be reported with the associated capital gains (or losses) on taxes within the U.S.
Virtual Currencies are IRS’ top priority
On July 2nd 2018, the IRS announced the taxation of virtual currencies to be one of their five focused compliance campaigns for the year, with John Cardone named the director of the campaign. It’s safe to say that the dramatic increase in popularity of cryptocurrencies in 2017 drew attention from the IRS.
This news has sparked the demand for cryptocurrency tax professionals to assist individuals with complicated tax profiles.
Crypto losses can reduce tax bills
With almost all cryptocurrencies falling in value last year, many investors are filing their crypto losses to offset other capital gains and save money on their taxes.
For tax purposes in the U.S., selling crypto is treated the same as selling other types of capital assets—stocks, bonds, gold etc. This means that you realize a capital gain or a capital loss anytime you sell or trade Bitcoin or another cryptocurrency. When you realize a capital gain (you sold your crypto for more than you purchased it for), you owe a tax on the dollar amount of the gain. However, when you sell (or trade) your crypto for less than you purchased it for, you incur a capital loss, and you can use this loss to offset gains from other trades or even a gain from the sale of other property like stocks in your portfolio.
Some active traders are saving thousands of dollars by using this form of tax loss harvesting.
Tax giant TurboTax gets involved in the cryptocurrency space
TurboTax is getting involved in the cryptocurrency space, making it easier for users to calculate their returns.
The process of organizing cryptocurrency trading history for tax purposes is not a fun one. It requires traders to look back at every single transaction they made and track down their cost basis, fair market value, and net gain from every single trade or sell at the time of the transaction. For many traders who are active in the space, doing this type of calculation by hand is an impossible task.
TurboTax is making the process simpler through their integration with CryptoTrader.Tax*, a Bitcoin tax software that simplifies the calculation of capital gains from cryptocurrencies. Users can upload their entire historical trading data and cryptocurrency income into the Crypto Trader platform and then export the data back into TurboTax, so that everything is included on their year-end tax return.
Cryptocurrency is still a young technology. As with any emerging technology, it takes time to build out the infrastructure that makes things accessible for average consumers. Compare that to the internet in the early 1990’s, which was nearly unusable for lay users until the Mosaic web browser in 1993.
The world of blockchain and crypto is no different. While taxes aren’t the most exciting piece of the equation, they do provide a significant barrier to entry for the average consumer when it comes to getting involved in cryptocurrency. It is likely that we will see both regulators and companies continue to make efforts in this space.
*The author is a co-founder of CryptoTrader.Tax, a company mentioned in this article. Crypto Briefing does not accept any payment or financial benefit from expert guest authors.
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