In May 2019, the IRS Commissioner said that the agency was in the process of providing new guidance on the calculation of cryptocurrency tax received as income and the value on taxable gains when trading or selling.
This is the second time, the agency is trying its hand at establishing rules for virtual currency in this digital age. The previous guidance in 2014 brought many unanswered questions and created more doubt. In the 4 years since then, the crypto market has grown exponentially evolving into a highly complex infrastructure that is rapidly growing.
The IRS made it compulsory to report all kinds of bitcoin transactions even minuscule amounts. Resulting in every taxpayer in the United States will be demanded to have a record of all purchasing, selling and investing or using cryptocurrencies to pay for a service or product because they are treated as an asset. By using one, you will acquire capital gains tax based on the duration of the holding term. Although this new guidance only addresses forks. Certain clarity arose related to questions calculating basis, gains and losses. The confusion was mainly among the nature of hard forks and airdrops.
The document reads:
“An ordinary income equal to the fair market value of the new cryptocurrency when it is received.”
“If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether, through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, you don’t have taxable income.”
“One unfortunate consequence of this guidance is that third parties can now create tax reporting obligations for you by simply forking a network whose coins you own, or foisting on you an unwanted airdrop.”
Understanding Bitcoin taxation is moderately a learning curve. The various dealings of how crypto coins are taxed, based on the framework.
The first step is to maintain records immaculately
There are hundreds of different organizations and entities that offer cryptocurrency services in the form of exchanges, intermediaries and brokers.
Ultimately, the individual is wholly responsible for maintaining the records pertaining to their cryptocurrency affairs. One’s bitcoin tax calculation should contain transactions dating back to the start. No matter how small the amount transacted.
There is an abundance of specific bitcoin tax softwares that record, analyze and calculate your cryptocurrency activities which are listed successively.
Keep in mind a few contingencies:
- If Bitcoins are received as a mode of payment for goods or services, the holding period does not matter. They are to be reported and taxed as ordinary income. The Federal tax may range from 10% to 39.6% also, there might be an inclusion of state income tax.
- If Bitcoins are obtained through mining activity, it is subjected to tax as ordinary income. There also might be a self-employment tax to be paid.
- If Bitcoins are procured from a hard fork exercise, through airdrop or other activities, it should be treated as ordinary income.
- If Bitcoins are purchased as a means of investment and later sold for profit, the duration of the holding period has a key role.
For instance, if the holding period is for more than 12 months, it is considered as capital gains and could attract a 3.8% additional tax on the net investment income. If the holding period is less than 12 months, the receipts are considered as ordinary income which might be subjected to state income tax.
However, only donations made to eligible charities do count for deductions. Selling tokens and then donating the amount will not impact your bitcoin tax obligation.
Quite disappointing to many crypto users who spend their coins on everyday purchases from the local coffee shop to paying the parking fee, the IRS said there would be no exemptions.
“The difference between the fair market value of the services you received and your adjusted basis in the virtual currency exchanged.”
Second, consider a crypto tax calculation software
Calculating Bitcoin tax is still largely new and its inception is just starting to catapult mainstream. Many people who dabble in the crypto market are unsure within themselves about which method is the easiest to use.
Even the core users who have made hundreds of bitcoin transactions have faced difficulty in keeping track of each individual purchase.
The big players in Bitcoin exchanges such as Binance do not display transactions dating back to more than 90 days.
Instead of listing out a comprehensive report on the different software and the services on offer. Let’s keep it simple and classify them into 3 main types positioned on the ease of use and the targeted buyer.
The Elaborate type:
If one is an individual with enormous amounts of transactions, adopt the practice of using a number of exchanges. In the case of international reporting, Cointracking is a striking one. Reports can be obtained with relative ease to calculate various situations to compare tax differences.
The American type:
If one is an individual that only pays taxes in the united states, the perfect solution is Zenledger as their professional service and ever continuous updates are elite.
The Effortless type:
If one deals directly with exchanges that support Bitcoin tax with a low transaction history and on a budget. The most economical choice is Bitcoin.tax
Apart from those, these are another few no-frills Bitcoin tax calculators:
Token Tax, the only cryptocurrency tax platform that accepts every major exchange.
CryptoTrader Tax supports many known currencies and has a user-friendly interface that allows importing of trades.
There is now a rapidly growing demand for good tax calculation software, collaborating with the IRS and other countries’ tax authorities to successfully identify crypto tax escapists.
The hardest part for individuals is the various trades done with different coins that turn into a burden once the transaction count starts to build.
In the coming decade, the cryptocurrency rulebook will become more refined and precise but until then, keep your eyes wide open for the blurred line between.