Crypto Tax Filing: Tips On The Processbr>
Cryptocurrencies occupy an interesting space in tax law. They are treated as property, and as such you are required to claim short- and long-term capital gains/losses on your tax returns. Some digital asset exchanges (ie. Coinbase and Gemini) will send US investors 1099-K forms if they have over 200 trades and $20,000 in total sales proceeds in the tax year. It is important to remember that it is the investor’s responsibility to self-report their gains/losses to the IRS, even if they fall outside the 1099-K delivery requirements from their exchange, if their exchange doesn’t offer 1099-K documentation or if they performed trades on a decentralized exchange (DEX) or peer-to-peer exchanges.
For active traders and users of cryptocurrency, these reporting requirements can cause a massive headache as you’re required to audit for prior transactions (trades and payments), establish a reasonable cost-basis from the exchange at the time of each purchase, sale or transaction in USD terms. This process alone might require multiple calculations in the case of alt-coin trades/payments that aren’t natively paired with the USD. The way I have gotten around this was to track my trades daily in order to build a database of transactions and assign the appropriate USD price at the time of the transaction versus retroactively calculating the appropriate exchange rate when I go to finish my taxes. In the future, as platforms like 1Konto hit the market, traders will have user-friendly brokerage services that perform the heavy lifting for them.
Long-Term vs. Short-Term
Once your tax documents and activity are compiled, it is crucial to separate your activity into two buckets: long-term and short-term. Long-term is classified by positions that are held for over 1 year and short-term are held for less than 1 year. Long-term capital gains (positions held for more than 1 year and sold at a profit) are taxed at zero, 15% or 20% depending on your income. Short-term capital gains are taxed at your top marginal tax bracket. It’s important to note that you can only account for realized gains/losses in your portfolio, meaning you sold the asset prior to December 31st 2018. Any sales made on January 1st 2019 will be accounted for on your 2019 tax return filed in 2020.
Tax Loss Harvesting
Credit Karma has recently reported that Americans lost $1.7B in 2018 and had unrealized losses of $5B heading into 2019. Many of these Americans were unaware they could claim a tax deduction on their realized losses, or they felt their losses weren’t large enough to claim. The guidelines for claiming a tax deduction from investment losses are as follows: short-term losses offset short-term gains, long-term losses offset long-term gains. If there are, for example, an extra $5,000 in short-term losses available, you are able to deduct up to $3,000 against other kinds of income and carry over the remaining $2,000 in losses to the next tax year. Intuit has a great FAQ on Capital Gains/Losses that addresses the variance exceptions to the general rule and I highly recommend consulting this and your tax professional before filing your taxes.
Being in crypto was rough this year and investors shouldn’t harm their portfolios even further by not taking the tax deductions that are available to them. As with traditional investing, proper tax management is a key tool to efficient investing and should always be taken into consideration. This practice, known as tax loss harvesting, is a common practice in the equity markets and sales must adhere to the ‘Wash Sale Rule’ which requires 30 calendar days before buying back into a ‘substantially identical’ investment or you are unable to claim the loss. This 30-day requirement can cross tax years, ie. sales made in December 2018 must wait the appropriate 30 days, even if that requirement crosses into the new year. Once the 30-days are up, you are free to buy back in the position and HODL once again.
The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this post or any of my posts constitutes a solicitation, recommendation, endorsement. All Content on this post is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing in the post constitutes professional and/or financial/tax advice, nor does any information in the post constitute a comprehensive or complete statement of the matters discussed or the law relating thereto.