Image courtesy of Austin Distel.
Due to the COVID-19 pandemic, the deadline to file and report your bitcoin gains and losses in the U.S. was moved forward 90 days to July 15, rather than the normal April 15 tax deadline. For bitcoin and cryptocurrency traders, this extension provides more time to collect all trading information needed to effectively file gains and losses with taxes.
In this article, we identify the questions you should be asking prior to the deadline to make your tax reporting as easy as possible.
1. Do you have any losses you can write off?
The IRS treats bitcoin as property for tax purposes. This means that capital gains and capital losses reporting rules apply to your bitcoin trades and transactions. Put another way, if you invest in bitcoin and sell or trade it for a gain, you have a capital gain. Vice-versa, if you sell or trade your bitcoin at a loss, you have a capital loss. Both capital gains and capital losses need to be reported on your taxes.
The silver lining is that any losses you have incurred from your bitcoin trading or investing activity actually reduce your taxable income, thereby saving you money on your tax bill.
Many people who have incurred losses over the year do not report them on their taxes. This is both illegal and unintelligent, as filing your losses directly saves you money.
When you are sitting down to do your taxes this year, take a look at your holdings and your transactions and make sure you have identified where you incurred losses. While you’re reviewing any losses for 2019, it’s a good time to think ahead for 2020. A good tax reporting platform can help you automate the process of identifying assets that you can sell at a loss for tax purposes. This practice is called tax loss harvesting and many crypto tax platforms provide this feature.
2. Which exchanges did you use?
To effectively get your tax reporting done, you need to pull together your transaction history from all of the cryptocurrency exchanges that you use. If you have incomplete records of your buys, sells, or trades, it will be impossible to calculate your gains and losses and track the cost basis in your assets.
Many of the major exchanges will allow you to import your trade history with API. What might take more time is locating your trade history from exchanges that have shut down or have limited access to certain countries. If an exchange does not offer responsive support then it could take weeks to secure a trade history file. If you’re filing for the first time in 2019 this can certainly be a wake up call as you consider where to invest for 2020. The ability to easily export trade history for tax purposes should now be one of the factors that you consider when choosing an exchange or wallet.
The first step you should take when preparing your bitcoin taxes is to take account of every crypto exchange you used. Once you have this list, retrieve your transaction history records from each of these exchanges. Cryptocurrency tax software can help you with this process if you want to automate it rather than do it manually.
3. Did you have any mining or staking income?
If you were participating in any crypto mining or staking operations, you will need to gather the payouts you received over the years and account for these.
Crypto earned from mining or staking is a form of income that needs to get reported on your tax return. The amount of income you recognize is the fair market value in U.S. dollars of the payout at the time you received it.
Matt received 0.00372839 BTC on July 1 as a mining payout. At the time, this amount of BTC is worth $20. In this scenario, Matt recognizes $20 worth of income and reports this on his taxes.
You can learn more about the tax implications of bitcoin mining in this bitcoin tax guide.
4. Did you receive a 1099-K from your crypto exchange?
Are you a high volume trader? Did you use exchanges like Coinbase, Gemini, or other U.S. based exchanges?
If so, there’s a chance you will receive a Form 1099-K. A copy of this form is sent to both you and the IRS, so if you received one, the IRS is aware of your crypto activity.
It’s very important to note that 1099-K is not an “entry” document—meaning you don’t actually include it with your tax return. It also only reports gross volumes from your exchange, not gains and losses.
Because of this, the form is actually useless for tax reporting. You should not use this form with your tax return; however, you should be aware that the IRS is aware that you do have crypto transactions that they should see on your tax return.
5. Do you have a DIY software tool to help you with your gains and losses calculations?
Instead of doing all of your gains and losses calculations for each of your crypto trades by hand, it can be helpful to use a DIY crypto tax software tool such as CryptoTrader.Tax to help guide you through the entire reporting process.
DIY crypto tax tools allow you to import all of your trade history into your account with the click of a button. The tools integrate directly with the exchanges you use to enable this functionality. Once all of your transaction history is imported, you can generate your necessary tax documentation with the click of a button. No manual work is required.
July 15 is approaching quickly. Make sure you pull together all of your records and get all of your bitcoin and crypto activity properly reported before the deadline. If this is your first year reporting crypto taxes the task of collecting old files from past exchanges may seem daunting, but it’s worth it. Not only will you avoid any future headaches with the IRS, but the upcoming years of crypto tax reporting will be much more streamlined.