Eight Things You Need to Know About Crypto Taxes

Knowledge is power, but without wisdom as to how to apply your knowledge, you could end up as a really smart fool. Here are eight things you need to know about crypto taxes. Equally important is the practical wisdom needed to help you apply each bit of tax knowledge effectively.

Eight Key Crypto Tax Facts

1. Big Bro and His Little Helpers Are Watching You

Yes, you must account for all of your cryptocurrency gains and losses. Blockchain technology does not make your crypto buys and sells invisible to the tax authorities. In fact, it can make it that much easier for them to monitor everything about you. Particularly your financial transactions. Big Brother is watching, and he uses your friendly banker, money transfer service, and crypto exchange as unpaid surveillance agents. They fear Big Bro as much as you do, and boy, do they have a lot to lose if they fail to comply with his demands for information about you and your transactions.

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The IRS has enormous arm-twisting power; be sure you document all of your crypto trades and file a legit Federal tax return. Image by Alexas_Fotos at Pixabay.

2. Bitcoin Is Taxable Property

Bitcoin is classified as property by the IRS. Anything the IRS is interested enough in to classify as property is something they are equally interested in taxing. You need to take action right now to get in and stay in compliance with all of the IRS rules governing cryptocurrency capital gains and losses. Love letters from Uncle Sam generally do not include flowers or chocolates, but they do come gift-wrapped with the implied threat of bank account seizures, fines, penalties, and in some Mafia-related cases, a RICO indictment and other criminal charges.

3. No Need for You to Report Bitcoin Wash Sales, Yet

Bitcoin is not subject to the infamous wash sale rules applicable to stock traders, at least not yet. However, since the IRS stands to make hundreds of millions of dollars a year by instituting this tax rule, it may yet be applied to Bitcoin, and to all other cryptocurrencies, possibly within a few years. If you’re not familiar with the wash sale rules, become knowledgeable about them. To save space here, the easiest way to avoid being nickel-and-dimed to death (tax-wise) by it is to trade only one cryptocurrency. Trade it infrequently, and never enter a new trade within 31 days of closing out the previous trade. Long-term trend followers and dollar-cost-average investors generally need not worry about wash sales. Swing traders and day traders are the main targets of the wash sale rules.

4. Plan Ahead, Avoid Surprises, Fill out Your Form 1040-ES

If you anticipate big capital gains or losses in your cryptocurrency trading, you should complete IRS Form 1040-ES. You keep this form for your records. You do not need to mail it to the IRS. Instead, you use the calculations in the form to determine if you need to make quarterly estimated tax payments. If you’re self-employed, you’re already doing this, so simply add in your anticipated crypto gains and losses. Pay your quarterly estimated taxes on time and everything’s hunky dory.

5. 1099-B, 1099-K, and Self-Responsibility

Some crypto exchanges (Gemini, Kraken, Coinbase, etc.) will issue you a Form 1099-K at tax time. Coinbase is also considering sending out 1099-B forms in lieu of the 1099-K. These forms contain important trade transaction dollar amounts that you need to prepare your Federal (state) income taxes. But what if your crypto exchange fails to provide you with either form? You’re still responsible for reporting every single BitcoinEthereumLitecoin, etc. transaction for the entire tax year.

You, not your broker or crypto exchange, are the party responsible for the veracity of the information in your 1099-B and 1099-K forms. Therefore, you must ensure that the info they provide you is accurate.

This article was written by DONALD PENDERGAST for CoinCentral.com

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