In March 2018, the IRS issued a press release in which they reminded taxpayers that they could be subject to criminal prosecution if they don’t pay taxes on their cryptocurrency profits. Any person that doesn’t pay taxes is subject to a fine of a quarter million dollars and a prison term of up to five years. However, one of the main problems in the crypto world of the United States is that people don’t really understand how to account for their cryptocurrency gains.
“It’s possible that many people never thought about tax implications when they got into the world of cryptocurrency,” notes Joshua V. Azran of Azran Financial. In fact, some people probably figured that that having any type of virtual currency would be the same as having cash. However, the IRS looks at this completely different. They treat cryptocurrencies just like bonds and stocks. Namely, if you bought any kind of virtual currency and haven’t sold it thus far, you didn’t realize any gain. If you’re in this situation, then you don’t need to report anything.
However, the moment you sell a cryptocurrency and realize a loss or gain, you will have to report it and pay your taxes. In order to help people understand more about taxes and cryptocurrency, the IRS issued Notice 2014-21 in which there are some detailed guidelines. Although this notice was issued in 2014, many people are still not mentioning virtual currencies on their tax returns. In fact, just 802 people mentioned them in 2015.
Although there are surely still people who are not aware that they need to pay taxes on their cryptocurrency profits, there are a lot of people avoid doing this on purpose. You may be thinking that the IRS can’t really know about your investments, so there is no point in reporting your capital gains to them. However, it’s not recommended that you hide things from the IRS, since you may find yourself in a situation where you’re faced with big fines and penalties should they find out what you did.
If you want to report your gains or losses to the IRS, you will need to write down information about each trade you make. First of all, you’ll need to mention when you bought the cryptocurrency and how much you paid for it in US dollars. After that, mention when you sold the cryptocurrency and how much money you received for it.
Certain exchanges can make this whole job easier for you because their reporting mechanisms allow you to easily get to this data. In case you didn’t keep records of your trades, you will need to start looking through your wallet receipts and email. Once you do this, you will have several options for calculating capital gains.
If you lose money on trading, then you can deduct your losses on your tax return. More specifically, you can deduct up to $3,000 from your taxable income in the event that your losses exceed your gains. If it’s above the $3,000 limit, then you can carry your losses forward for years, since they won’t expire. Unfortunately, the limit the IRS provided is really low.
Some companies have started encouraging people to pay taxes on cryptocurrency profits. For example, Coinbase has started sending 1099-K tax forms to all the people that made over 200 transactions in one year in more than $20,000 worth of cryptocurrencies. This has definitely helped raise awareness about the obligations of people that trade virtual currencies.
If you’re thinking that you have to pay taxes on cryptocurrency profits online if you cash out, then you’re wrong. Keep in mind that even if you use virtual currencies to pay for certain services and goods, you’ll need to mention every purchase and treat it like a sale.