Are you prepared for the “crypto crackdown?"
How to stay ahead of the IRS and be fully compliant
The explosion of crypto-currency over the last few years has made a material change in the tax landscape for most investors. There is a lot of confusion about what to report, how to report, and when to report it. There is a lot of mixed guidance out there about compliance, and much disagreement amongst tax professionals. While a discussion with a CPA is important to ensure that you are doing the right thing, there are some simple points that apply to everyone.
Every buy/sell transaction is a taxable event - Each time you buy and sell cryptocurrency, it is a taxable event that needs to be reported on your tax return.
Not all brokers comply with reporting law - Not every broker provides official tax forms reporting your cryptocurrency activity, which means it is still the your responsibility to keep track of gains and losses and accurately report them on your tax return. If the software you use does not provide a running gain/loss summary, I would strongly recommend you keep an excel spreadsheet so when it comes to tax time, this information is readily available.
Trading one cryptocurrency for another is also a taxable event - There is a common misconception that if you sell one type of coin and buy another, it is an “exchange” that is not taxable. This is false; trading one coin for another is also considered a taxable event and must be converted into USD for inclusion on your tax return.
Trading cryptocurrency is usually a capital transaction rather than an ordinary one - The majority of the time, trading cryptocurrency is a capital transaction that is reported in the same way as selling stocks. The only exception is if the trading activity is part of an active trade or business. In this case, the activity could be considered an active trade or business that falls under the ordinary income laws. However, beware that if you have a full time position or another line of business, chances are the IRS will consider the activity an investment.
Loss harvesting - As cryptocurrency is considered a capital asset (with the exception of the above), you can use losses to offset capital gains from stocks. If you have realized capital gains, consider selling losing cryptocurrency to lower your tax bill.
Final thought - Wash sale rules regarding cryptocurrency are currently unclear. If you have cryptocurrency losses that you are hesitant to realize because you believe the currency will go up, I would recommend speaking to your tax advisor about the options you have related to circumventing wash sale rules. There is the potential to legally exploit a loophole here; however, it is likely that loophole will be plugged in the very near future.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.