Bitcoin Tax Guide for 2018 Crypto Traders and Investors

Did you know that even though you perceive cryptocurrencies as virtual currencies, the IRS perceives them as property hence they are taxable? If you did not know well now you know, and if you are a player in the world of crypto, then it’s time you brace yourself and pay, or experience what we refer to as the wrath of the IRS on tax evaders. 2017 was quite a wild ride for cryptocurrencies as tons and tons of investors, and crypto enthusiasts managed to evade the complex tax regulations. However, as the interest in cryptocurrency continues to skyrocket, findings show that only several hundreds of the parties involved tend to report their gains. This has prompted the IRS to be more vigilant on the issue, and as such, you can expect Bitcoin tax 2018 to be a tough year for those who try to evade crypto taxes. People also made a lot of gains from coins such as Bitcoin Cash forks. For instance, because the IRS cannot achieve that on its own, it has employed the services of expert companies in the world of crypto such as Chainalysis to hunt down tax evaders. Unfortunately, the IRS provides insufficient information and guidance on the issue which is why we seek to help you be on the safe side through our step by step guide on how to pay crypto taxes.

The Ultimate Guide to Crypto taxation in 2018
The Ultimate Guide to Crypto taxation in 2018

Various taxable crypto transactions

Before we take a deep dive on how to pay crypto taxes, it is essential that you understand whether the area you are involved in is taxable. The reason we first highlight this is because most crypto holders do not even know they are evading taxes because no one has informed them that they should be paying. How you acquired your crypto or what you do with it affects how you pay its taxes which is why below are various crypto transactions and the tax implications that they have to help you get a grip on this complex matter.

  • If you bought your crypto, for instance, bitcoin but you are yet to exchange it for any good or service or even exchange it for another crypto then you are safe because no taxes for you. In other words if, for instance, you bought Ethereum and you still have it in holding then you don’t owe anyone taxes
  • If however, you bought your crypto and then used it to purchase property or pay for services, then you better begin filing your taxes before April 15th because that transaction is taxable. For instance, if you are an employer who pays employees using crypto then ensure that you report the employee earnings to Uncle Sam using W-2 forms
  • If you exchanged one crypto to another, say you used altcoin to purchase bitcoin, ripple or Ethereum that still creates a taxable transaction because the IRS treats that event as selling; hence you reported gains or losses
  • If you converted your crypto from virtual currency to the US dollar, for instance, exchanged bitcoins for hard cash, you still reported capital gains so yes, this too is taxable. Nevertheless, note that buying crypto using USD is not taxable until you trade, sell or use it. So note the difference to avoid confusion
  • Mining coins successfully is also taxable as it is categorized as ordinary income

Keep in mind that taxes on crypto are calculated by the IRS on a first-in-first-out basis so the longer you hold your cryptocurrency without spending it via the methods shown above, the lesser the tax burden you owe the government.

How to pay crypto taxes

Bitcoin Taxes are going to be due in 2018
Bitcoin Taxes are going to be due in 2018 for traders and investors

Now that you know whether you need to worry about the D-date, it is about time you learn how to pay your crypto taxes.

Create a record

The first step on paying your taxes begins by you creating a record of all your cryptocurrency transactions. That means from the word go when you bought it to the last thing you did with it. Fortunately, most of these transactions are often on your blockchain or with your wallet provider, so that’s easy because all you need to do is download the records and save them as CSV files. Easy right? Well not for long because once you have the CSV files, you need to convert the value of each transaction into dollars and it should be the value of the cryptocurrency against the value of dollars at that particular time. Luckily, you don’t have to be an accounting guru as there are plenty of websites such as coin desk which are dedicated to showing you the value of that specific crypto against one dollar during the time of sale. In addition, there are sites which can handle the stress for you and all you need to do is upload the CSV files and they will do the math for you.For instance, Tax is an example of a site which helps bitcoin holders do their taxes and is often free for up to the first 100 transactions.

Where to report

Now that you already know what you owe Uncle Sam, what next? Once you have the records, the next step is to fill out your tax form, and you do this on schedule D where you find an attachment of form 1040. However, this applies to anyone who buys crypto and then sells it at a higher price hence gaining income. Additionally, how you report depends on when you bought the crypto. For instance, if you happen to have held your crypto for more than a year then you are categorized as a long-term capital gainer and as such you will get lower rates of 0-20 percent while if the duration of holding is less than twelve months then your crypto is taxed as short-term capital gain hence you get the same rates as ordinary income. Remember that the amount of tax you owe Uncle Sam depends on how you acquired the cryptocurrency and also the period that it has been in your possession without being put into use. So a taxpayer paying taxes for crypto mining pays a different amount from one who used his/her crypto to purchase assets or pay for services. To help you understand we put together a table which simplifies the entire process.

Acquisition method Period withheld Reported as Extra tax

Offered as payment for services N/A Ordinary income State income tax

Purchased for investment purposes Less than 12 months Ordinary income State income tax

Purchased for investment purposes More than 12 months Capital gain 3.8% of top 3 tax brackets

Mining N/A Ordinary income Self-employment(only when applicable)

Bitcoin Fork N/A Ordinary income TBA

 

How to pay less

We all hate paying taxes, and most of us do it because it’s an obligation. Who wouldn’t hate it considering it cuts off an amount that could have otherwise be pretty in your pocket. That is why we went on to research on various strategies one can use to pay less. The first and also main one is to hold your crypto. Like mentioned earlier, crypto which is in holding is not taxable. Another method is to donate some of it to charity so you can use that platform to convert it to hard cash. This method is often used even in regular taxes.

Final thoughts

The last time the IRS gave out any information regarding crypto and taxes was in 2014, so there’s still so much more that we don’t know regarding crypto and taxes. In addition, there’s also a lot of misleading information out there regarding crypto taxes, so it is essential that you take caution while seeking advice but if you happen to belong to the above categories, please pay your taxes as early as now to avoid last minute rush and also problems with the authorities.