Bitcoin, Cryptocurrency, and Your Taxes
Ya’ Big Lug: So you were one of those people the investing gurus called an idiot for the last few years. You were so stupid in fact that you cashed out in 2017 with over 1,000% in gains. Well the jokes on you, you poor poor intellectually challenged thing. Now you’re going to have so much time on your hands, since you are probably retiring a decade or two early, that you’ll be forced to sit around and really think about just how dumb you really are.
What Taxes Will you Owe?
Joking aside… you do still have to pay the piper. If you are familiar with trading stocks and bonds you will be somewhat familiar with the way Bitcoin or any other cryptocurrency is taxed. Basically the gains you made from selling your bitcoin are considered a Capital Gain. The question is if you have a short-term or long-term capital gain.
Short-Term Capital Gains
If you held bitcoin for less than a year (short-term capital gain) you will basically just count the gain like regular income and tax it accordingly. If you held it longer than a year then you get to take advantage of long-term capital gains.
Long-Term Capital Gains
If you held your Bitcoin or other cryptocurrency for longer than a year before selling it for a gain, then it will likely qualify as a long-term capital gain. This is good news indeed. According to the IRS, “The tax rate on most net capital gain is no higher than 15% for most taxpayers. Some or all net capital gain may be taxed at 0% if you’re in the 10% or 15% ordinary income tax brackets. However, a 20% tax rate on net capital gain applies to the extent that a taxpayer’s taxable income exceeds the thresholds set for the 39.6% ordinary tax rate ($418,400 for single; $470,700 for married filing jointly or qualifying widow(er); $444,550 for head of household, and $235,350 for married filing separately).”
Long-Term Gains Breakdown: in other words…
- If you held your Bitcoin for longer than a year and you are in the 10%-15% tax bracket you will owe 0% in taxes on the net gain.
- If you held your Bitcoin for longer than a year and you are in the 25%-35% tax bracket you will owe 15% in taxes on the net gain.
- If you held your Bitcoin for longer than a year and you are in the 39.6% tax bracket you will owe 20% in taxes on the net gain.
Note: I’m not a CPA; this is just how I am interpreting what the IRS is saying. Also… it is likely this will change to some extent in 2018 due to the new tax plan and new tax brackets, but the overall principle should stay the same (only with different brackets), and long-term capital gains will still be your friend.
What if you lost money?
It’s also possible you sold your cryptocurrency for less than you bought it for. Again you can treat this the same way you would a stock. You can offset your losses against other capital gains you made for the year. So for instance, if you only had two investments for the year, a $10,000 gain on Stock-A, and a $10,000 loss on crypto-B, then you netted $0 in Capital Gains and don’t owe any taxes. If you don’t have enough gains to net against, you are allowed to deduct $3,000 a year against your regular income (essentially reducing it and its taxes). If you lost $9,000 for instance, and have no gains to offset against, you can use it to offset (lower) your regular income by $3,000 for 3 years. (carrying the loss forward each year)
Reasons you might need a Tax Professional (it might be more complicated)
Laws and Precedents in crytocurrency are changing rapidly. If your gain or loss isn’t as simple as you bought a couple coins and sold them a year or two later, then you may want to talk to a professional. Especially if you answered yes to any of these questions.
- Do you live in a state that taxes Capital Gains or Regular Income? If your state does you may owe additional taxes beyond the Federal ones I outlined.
- Did you actually mine the coins instead of paying for them with dollars? This could be difficult to determine because not only will you need to estimate the base cost at the moment created, but you will likely want to offset the revenue with the expenses incurred to mine the coins, (video cards, electricity, etc.) assuming this is a business.
- Did you provide a good or service where you were paid in cryptocurrency? It could be that the initial amount received is taxed as income, and the gain or loss on that amount when sold, is a Capital Gain.
- Did you sell one cryptocurrency and immediately buy another one? Contrary to what many traders think about this being a like-kind exchange,,, you may still have to count the initial sale as a capital gain.
- Did your currency fork? Should it be treated like a stock split? What’s the Fair Market value of the added coins? This is all new to the IRS… But you can bet they will probably tax it.
- Did you make transactions over $20,000 on Coinbase? Your numbers better match what Coinbase is sending to the IRS.
- Do you think that because your Bitcoin account is held outside the country you don’t have to report it? Think again… especially if it’s over $10,000 in value.
- Were you paid in crypto, but you didn’t sell it and it went to zero later? You may still owe taxes!