Last year, the cryptocurrency revolution hit hard. Suddenly, everyone seemed to be buying and selling cryptocurrencies—often on total speculation.
This caused a lot of excitement, but it also overheated the market. As a result, the price of Bitcoin dropped from a high of over $19,000 in December 2017 to a low of around $6,100 in February 2018. Bitcoin is currently trading in the $7,000 region, but how it will end the year is anyone’s guess.
While the ups and downs of the cryptocurrency market certainly make for some excitement, they can also trigger unwanted tax liability.
This is particularly true among high volume traders who buy and sell coins on a regular basis. Some coin traders made small fortunes last year in the runaway crypto market. However, this was certainly not true for everyone. Regardless of whether you ended 2017 by winning big in the crypto markets, or you lost your shirt in the slump that followed in 2018, you still must report your cryptocurrency activity to the IRS.
Crypto traders can’t avoid paying taxes on cryptocurrency investments, but their tax liability can be minimized by tax professionals who are proficient with crypto taxes.
Crypto Tax Academy offers in-depth self-study courses for professionals of all levels looking to advance their knowledge in the fast-growing cryptocurrency space, obtain a foundational understanding of cryptocurrency and blockchain, and most importantly, incorporate crypto tax services into their practice.
Bitcoin had a big year in 2017. The price of the world’s first cryptocurrency spiked to over 13 times its value at the beginning of the year. As exciting as it was, much of this bull trend was fueled by speculation. When speculators bailed out of the market, Bitcoin—as well as all of the cryptocurrencies that followed it—began to slump in value. Although the entire market is down in 2018, Bitcoin’s value is still substantially higher than it was this time last year.
So, what does this market activity have to do with taxes? Crypto investors who liquidated their holdings in 2017 obviously owe capital gains on the proceeds from their trades. But what about the “Hold-On for Dear Lifers”? Unfortunately, they may be on the hook for a hefty tax bill as well.
The IRS has a very broad policy regarding cryptocurrency taxes. Every sale, exchange, or purchase made with virtual currencies is a taxable event that must be reported to the IRS. For high-volume coin traders, this may mean hundreds, if not thousands of transactions they need to report on their tax returns this year. Even worse, many of the transactions that crypto investors must now pay taxes on were coin-for-coin swaps. These types of investment moves are often a way to diversify a crypto portfolio, and they are not necessarily intended as a way to realize proceeds from a trade.
According to the IRS, Bitcoin and other virtual currencies are capital assets, and, like all other capital assets, cryptocurrencies are subject to capital gains tax. This tax applies to all U.S. taxpayers, regardless of whether they buy and sell cryptocurrencies for investment purposes or use virtual currencies for goods and services. The tax rate you must pay depends on the length of time you held your virtual currency assets before selling them, as the IRS charges a different rate for long- and short-term capital gains.
So, if you traded cryptocurrencies, or even dabbled just a bit in 2017, you must report this activity to the IRS. However, determining how much you must pay on your crypto gains can be tricky. This is because the amount of capital gains tax you pay largely depends upon your cost basis. This is the cost you actually paid for a crypto coin when you bought it, plus any related costs, like commissions and fees. When you purchase a cryptocurrency, you’ve established your cost basis. However, the asset is not actually taxed until you sell it or exchange it for another coin or use it to purchase good or services. This is when you “realize” your gains or losses on the investment.
Crypto tax liability is triggered whenever someone trades cryptocurrency for cash or other crypto coins, or whenever someone uses cryptocurrency to purchase goods or services. As a result, many people who traded cryptocurrency in 2017 incurred a substantial tax liability simply by just setting up their investment portfolios. Here’s an example: an investor purchases Bitcoin but decides to diversify into Ripple as well. The investor trades some of her Bitcoin for Ripple, and both coins remain in her wallet as long-term capital assets. Even though the coins are never sold, the sale of Bitcoin for Ripple qualifies as a taxable event.
Altogether, experts estimate that American cryptocurrency investors owe about $25 billion in taxes for coin trades in 2017. What’s worse, this tax liability was triggered during a spike in the crypto market. As a result, many people are stuck paying taxes based on Bitcoin prices that were twice what they are now.
When it comes time for traders to report their crypto activity, preparing their returns can be overwhelming. But the old saying is true: the best defense is a good offense! There’s no replacement for good tax planning based on solid advice from a qualified crypto tax professional.
This is exactly the training you’ll find at Crypto Tax Academy, the industry leader in crypto taxation learning.
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