IRS Tax Rules for Cryptocurrency in 2018

in #crypto-news4 years ago (edited)

irs_tax2018_2.jpg

It is worth noting that no one ever proved that cryptocurrency could fall under a like-kind exchange. Whether that tax treatment was ever permissible in the USA would have depended on an IRS hearing. This hearing never happened.

Due to the new tax legislation, a like-kind exchange for cryptocurrency is 100% certain to not be permissible. The new tax legislation signed into law for 2018 has determined that a like-kind exchange is limited to real estate only. It no longer includes other possible assets.

This article is not tax advice. No warranties are made.

How is Crypto Taxed in the USA?

Cryptocurrency is treated as a capital property for IRS tax purposes. This means that people are supposed to file a Schedule D with their normal 1040 form. In these types of gains, there are specific rules that apply. At a basic level, we calculate our basis for the asset, and then when the asset is exchanged, at that point we would calculate whether we have a taxable gain or loss. What this means is that a cryptocurrency is treated similar to a stock exchange, except you are not going to get a fancy tax report to make it all easy.

In the world of stock brokers, each broker must prepare a 1099 form, showing your calculated gains and losses with the firm. This makes tax preparation super simple when it comes to stocks. With cryptocurreny, this simple tax prep becomes complicated because US exchanges do not prepare 1099 forms, and are probably unable to due to the nature of cryptocurrency being a medium of payment.

Why is cryptocurrency so different?

With a cryptocurrency transaction, very often, they are not exchanged for USD. More usually, they are exchanged into other cryptocurrencies such as Bitcoin or Ethereum. When this exchange occurs, US tax laws would have us recognize the fair market value of each property, and this fair market value exchange would create a taxable gain or loss.

In other words, in the US, when people sell 100 Steem for so much Bitcoin, this is a taxable sale if the sale results in a fair market value appreciation of Steem from the calculated basis. What makes this more difficult is that the person has now entered into a new capital asset calculation because they have purchased Bitcoin.

A simple thing as buying bitcoin to buy steem, holding steem, and then selling steem through bitcoin would result in 4 reportable capital transactions to the IRS, especially if Bitcoin was held for any period of time.

Only the most fastidious accountants are likely to be 100% tax compliant when it comes to cryptocurrency situations.

How is Steem earnings taxed?

Believe it or not, Steem earnings are taxable too in the US. When you earn Steem or SBD, this is business revenue. Personal business revenue is reported on a Schedule C form to file with your 1040. You would calculate this revenue at the fair market value on the date you acquire the funds (when you click the redeem button). This would be business revenue. Since you likely do not immediately sell that Steem Power and SBD, you also create a secondary business investment transaction. The basis for the investment would be whatever you recorded as your business revenue. Then when the Steem / SBD is sold, a gain/loss would be calculated at the fair market value of those properties when they are exchanged for something else.

What did you just say!? Will this nightmare end?

My evaluation of the US empire is that as empires grow older, the laws and customs grow more intricate and complex based upon years of law precedent they rest upon. These ritualistic laws become increasingly meaningless for practical purposes, but empires seldom care. In the end, the inefficiency of an old empire becomes its undoing because laws that serve to the public detriment rather than its protection or advancement pile up through each successive generation, weighing down society. The US government will not always exist, which will be the end of IRS taxation nightmares. Until that era, the IRS will likely exist.

Source: https://www.forbes.com/sites/robertwood/2017/12/28/loophole-allows-tax-free-bitcoin-exchanges-into-2018/#dab350c12fab


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To the point of whether federal taxes are voluntary, actually legislated etc. etc. ... it doesn't make a difference. Even if there was a page in the lawbooks that said in huge red letters "Y'all needs a pay yo' taxes. That be the law." that doesn't make it any more legitimate.

Taxation is theft, pure and simple. And you don't quibble about whether getting robbed is "voluntary." Pay them or don't, but don't try to use clever word games to weasel out of paying your fair share of the extortion. These people want their money and they will literally murder you without remorse in order to get it.

In my libertarian political viewpoints, I have wandered far past "right and wrong" when it comes to government. In the Bible we learn that all governments are evil. This is why Jesus destroys world governments in Revelations when he returns. A symbolic depiction of God destroying man's flawed government systems is seen in Daniel chapter 2: "During the reigns of those kings, the God of heaven will set up a kingdom that will never be destroyed or conquered. It will crush all these kingdoms into nothingness, and it will stand forever. "

Despite all governments being evil due to the general corruption of mankind's behavior, God encourages us in the New Testament to pray for government officials. God even says taxation at gunpoint is something good for the present era:

"For government is God's servant for your good. But if you do wrong, be afraid, because it does not carry the sword for no reason. For government is God's servant, an avenger that brings wrath on the one who does wrong."

In other words, God uses evil government sometimes to accomplish the purpose of dispensing justice or keeping general order to save life. An example of this might be the government of Iran. According to the Bible (and I agree with what it is saying), the Iranian government is a "good" government. Good in the sense if a muslim goes rampaging on the streets of Iran killing people willy nilly for no reason that benefits the government, the government is going to arrest that person and jail or kill them. This is why government is good. Where governments failed due to US intervention like in Iraq, people do go around killing willy nilly. I'd rather live in Iran than Iraq in terms of personal safety and livelihood.

So this idealism libertarians and volunteerists have about government is misguided. They believe governments can be reformed, improved, ect. Any real reformation of a government has to come from a reformed heart, political idealism wont cut it because if people still engage in evil at the end of the day, that evil spills over into other areas, back into government.

A well designed government governed corruptly is worse than a poorly designed government governed virtuously. So at the end of the day, if I want a good government, it is more about having a reformed heart than it is about this or that idea. People who have a reformed heart don't mind so much when we are wronged. Jesus said love your enemies. People who do this are the solution. It solves the corruption that corrupts governments.

Libertarians and volunteerism often care very much they have been wronged, we go around making big points of it, holding it against others. But I have learned to forgive them and I have moved on.

I'm late to reply, but I appreciate the core of what you're saying here. In the end, the most powerful changes are the ones we make to ourselves. We are better off when we turn our utopianism inward. Give Caesar his due, because Caesar is surely not going away in this lifetime. And then spend the rest of the day according to the principles of a "reformed heart" (to borrow, and possibly abuse, your term.)

In other words: C'mon people let's be realistic. If you want to be effective, you've got to have an accurate estimation of the situation you're dealing with. Get a good read and proceed accordingly. Which means pay your taxes. You can't upend the system from inside a prison cell. Unless you're Nelson Mandela. And you're not Nelson Mandela.

Great post man. I think in Australia it will be similar and I have been wondering how much paperwork would be needed to report all my crypto dealings properly. You answered it - A shed load.

I really do not see how taxing cryptocurrency at the exchange level or on the blockchain level (e.g., Steemit, Ethereum) is going to be done currently. The systems are not in place to make it easy for folks to be tax compliant so I envision a tremendous amount of non-compliance not because people don't want to be (although some surely don't) but because it's extremely difficult to calculate manually. You alluded to this point re: tax accountants.

I'm not aware of any US regulatory agency providing an easy solution to the exchange challenge. For fiat gateways like Coinbase and Gemini, this tax compliance should be easier because they are already regulated financial institutions so they should have the systems in place to assist their users.

Well the law exists and can be enforced, without crypto being practical. Widespread compliance is unlikely, but any individual person can be audited by the IRS. When the IRS does a personal audit of your taxes, they are going to ask for our documentation to support our tax filing. If we reported capital gains from crypto, then they're going to want to calculate the basis themselves... at which point we can show them our exchange accounts on bittrex and they can wade through the transactions and fair market values if they desire. Or the auditor themselves has the authority to reach an individual compromise with the person they are auditing.

Now, if you never disclose crypto earnings, the way a normal IRS auditor would catch it is they would be looking at your bank records. It depends on the type of audit, but they may ask for your checking account records to substantiate everything. If you got large sums of deposits from coinbase.com they're going to ask about it. From there they can figure out you have cryptocurrency capital gains or revenue.

The IRS would make life so much easier on themselves and everyone else if they just taxed the crypto to fiat exchange. As it stands right now, that's how I plan on reporting.

I agree its the law and can be enforced. I was just suggesting that it's likely going to be some time before everyone can actually be compliant.

Also, if someone opened a tax compliant crypto exchange, I think they would be very successful. A lot of people want to be compliant even though it is difficult.

A very very good point - someone opening up a tax compliant crypto exchange and being successful. I would definitely open up an account with that exchange that would do all the calculations for me (just like any ordinary online stock trading exchange would) so I never have to dread being audited by the IRS on my crypto currency trades - knock on wood! Oh I just wanted to add that in South Korea (one of the most active crypto currency trading hot pots in the world) one does not have to pay any capital gain tax when trading crypto currency. This is probably one of the reasons why South Koreans account for heavy percentage of all trading even though their total population is about 1 / 7 of that of the US.

Yeah, I'm searching the net right now trying to get a clear idea of how to file this year... it's really frustrating and it's kind of making me angry.

edit: Oh, and then you get to go figure out how to do the state taxes. Bureaucracy is an old French word that means "we are here to rob you AND make you do paperwork, too."

I agree with this. In Europe we are having a lot of talk at the moment about how Cryptos are going to be taxed or how they actually taxed. Since there is no clear indication on the side of the most Gouvernments of the EU, others already worked out clear directives (like Austria and Germany). Even the European Cour of Justice had already a case about taxation regarding mining. It is a very interesting new field, for investors as well as for business people that organize the exchanges. If we would have a clear legal framework how investors would be taxed, it would also become more interesting for the average investor to go into crypots. Since at the moment he is in a grey zone where he actually can´t really calculate the risk and the earnings after taxes. I predict that 2018 will be the year of Crypto taxes, at least in Europe.

I have been using CoinTracking for the past two years and all I can say are good things. One of the smartest customer support I've ever experienced. I've used about 4 other portfolio tracking, and none come close to what CoinTracking offers, usability and design is great.

The companion app is amazing as well. Now I can quickly see a snapshot of all my investments, regardless of where they are located, in one easy to use app.

Although the free version is good, import each CSV file from each exchange is time consuming, with the PRO version all your transactions are up to date with one time setup.

You can use my affiliate link which gives you 10% discount.

Hope this helps!

I made a free tool to help people do their taxes! It looks up BTC price by time and tells you the price of BTC as well as the usd value of your trade. Take a look http://ge.tt/3GCXLdo2 and here's a video

@crypto-investor,
I don't know whether how this mechanism established in other countries! But in my country it will take a long time to monitor crypto based businesses! This is a good thing for me anyway :D
Great article and thank you very much for giving us a brief idea how things going on!

Cheers~

Thanks for the information about taxation of cryptocurrency in the United States. I think eventually the IRS might make some more clarifying rules in the future.

So if you manage to define it as a simple income meaning a 1040, then if you present the correct information you dont need to pay tax for it in the US:


But it may not be simple since this is something that "people isnt supose to know"

As a professional accountant, I used to study this claim that the IRS taxation system is a facade and "voluntary".

This is actually an internet deception being spread around. I may agree with the core claim that the IRS had no original legal authority to do anything. But even lacking any real legal authority, they were granted jurisdictional authority to enforce their system.

It's not just phone calls. They'll bust into houses at gun point, seize assets, seize records. They'll do this even if you claim they have no legal ability to do this. So this thing on the internet is disingenuous.

They should talk about all the disaster cases where people attempted this and ended up paying huge fines, going to jail, ect. I'm all for sticking it to THE MAN. But be prepared to live your life in perpetual lawsuits fighting never ending battles with the government. Easier to just pay what they think you owe.


"Any person who willfully attempts to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof: Shall be imprisoned not more than 5 years." - https://www.irs.gov/compliance/criminal-investigation/related-statutes-and-penalties-general-fraud

Claiming you never owed it wont lift a felony tax evasion if the court thinks you do owe it.

Yes it is true that the IRC wil use force even though its illigal force it will be done and they wil not be held accountable by the system for using force to extract taxes. Hence "it wil not be easy". But no its not a deception, because most videos about this is very clear in pointing out that " the law does not exist" not claiming that you can simply stop paying it and nothing wil happen. ITs also true that its easy to conclude that you can just stop paying it, but that is only if one do not know how power hungry the system is.
So what I see as needed to get away is either being an individual with lawyer friends and alot of publicity and doing it openly, or being a large local community that does this together and backing eachother in the event of illigal enforcement happening.

As looking at your ending quote, its 100% true what jeff and others directly claims, that taxation is theft at the threat of violance / at the point of a gun. In other words; equivilent of a mafia organisation.

In the end it comes down to; to what degree you are willing to take up the fight against corruption and injustice.

This is a good high level summary of the tax law surrounding cryptocurrency.

All taxes in the USA are VOLUNTARY.

lol you're right because all they can do is put you in jail, does not mean they can get your BTC private key you got memorized... Crypto has made all taxes voluntary!!!!

Plenty of Jail space!

ohhh how its possible i think everyone say its totally decentrilized and if here are tax then how many percentage of this taxes and are these tax apply in only usa or in whole world @crypto-investor

If you're a US citizen, you got to pay US tax generally. You can even be living overseas and owe federal income tax on your earnings. A foreign corp owned by US investors can generally get away without paying US taxes.

I don't think citizenship matters. The only thing that matters is:

a] where the money is made (earned)
b] where the money is moved to

So earnings of US citizen in Frankfurt Stock Exchange (EU) will be taxed in Germany. If said US citizen is currently living in Germany and spends it there, there is no taxation from US authorities. Once this US person moves their earned money to US, it will be taxed again according to US tax code. This is called double taxation.
Most developed countries have treaties, which enable you to avoid double taxation. This means, that you would only be paying the difference between German and US taxes when moving the money to US (which would actually mean you wouldn't pay any, because German taxes are higher than US taxes). The problem is, that this entails another batch of paperwork including tax bureaus in both Germany and US. You can imagine this is not pleasant.

I think it works the same for companies. This is the reason, why US companies are hesitant to bring money back to US. They are holding them abroad and waiting for tax holiday. If they brought money back, they would have to pay the difference between the US tax and the tax of the country of origin.

US citizens have to pay taxes, even if they don't or haven't lived in the US for many years. If I remember my tax courses correctly (its been over 5 years), any non-citizen doing transactions with a US entity will also have to file taxes.

hey mate great content , love your technical style and not afraid to give negative assessments when needed. do you think the recent spike in alt coins is due, in part to these new tax laws. people buying there long term holds now so as not to be taxed jumping from coin to coin?

I've been audited these two consecutive years by the IRS and each of those times I did my taxes correctly. Crypto's is going to only increase my chances of being audited every year for the rest of my life. Not to mention the passive income from MN's...

Perhaps we can move to a fair tax system? But then the politicians will cry foul because it doesn't keep them in power.

this is something new to me, thanks for this information...

oh i just saw someone yesterday who needs help on this thing and i was not able to help him glad that you shared this will be sharing the link

so they have implemented on tax too i have zero knowledge on taxes

valuable information

@crypto-investor, I have a question for you. I can't remember any of my tax courses because its taxes. So for those of us that own masternodes in multiple currencies. If I understand this correctly:

  1. We are going to have to pay taxes on our passive income earned on a daily basis from coins received by owning a MN.
  2. To exchange that coin for BTC we're going to have to pay taxes on any gains right?
  3. Selling BTC for USD, that's another tax..

So if I get this correctly, I may be paying over 50% in taxes on the aggregate?

What's the incentive for me here?

This is not tax advice. This is just a discussion of what I think I know. No warranties are given.


Masternode earnings would be a business revenue in the USA. A MN provides a service and receives a revenue for the services provided.

So for a MN, you would recognize the revenue earned when you receive the MN coins into possession. You would recognize revenue at the fair market value of the coin when you receive it. So before you exchange into BTC, you have a business revenue.

Exchanging it into BTC results in a conversion of investments. The MN coin revenue has a basis of whatever you recognized as the revenue, so it is like purchasing that coin at the revenue valuation. This would be your basis for a gain / loss going forward on any capital gains your company may report. So you might recognize $1,000 revenue, but if the coin tanked 50% when you sold it, you might also recognize a 50% short term capital gain loss. Capital losses are limited, though so be aware if you recognize a lot of revenue, then the coin tanks, you could max out the amount of possible losses while still owing on the revenue portion.

So... 1) Revenue, 2) Capital gain loss into BTC 3) Capital gain / loss into USD.

You would not be paying 50% tax. If it was all profit and all gains, you would just pay the net result of whatever the USD value was. So if you did all 3 things, all inside 1 year, and it all cashed out into profitability at $1,000, you would pay the normal tax rate on $1k which works off of normal tax bracket earnings, which is definitely not 50%. It's not double-taxation, it is just a very convoluted system to arrive at normal taxation, with pitfalls should you manage it wrong such as having a huge capital loss following a large revenue reporting.

To simplify this for tax reporting, a person could regularly and systematically turn MN profits into cash, and just switch to recognizing the cash received into the bank as revenue. If it was done regularly, I think the IRS would be okay with that (I think). Then if you want to own crypto, you just own crypto investments and hold them like normal capital investments and you manage that like you would stock investments.

Cool brother, thanks for breaking that down. I now have a good understanding on what I have to do.

Your basis on the second exchange (from BTC to USD) would be the price of BTC in USD at the time of the exchange. If you traded your first crypto for BTC and then immediately to USD there would be no gain on the second transaction.

I found this episode of Laura Shin's Unchained with tax attorney Tyson Cross and CPA Jason Tyra very informative. Sounds like a lot of these commenters need to listen to it!

https://soundcloud.com/unchainedpodcast/the-tax-rules-that-have-crypto

I think a theory could be advanced that says that since Congress outlawed like-kind exchange starting in 2018, that it was therefore okay pre-2018.

Plus, if people really really want to be compliant (less than 1000 Americans reported crypto gains in 2016), there is a good tool to do just that at https://cointracking.info . I have no interest in posting this other than to point people to a workable solution.

crypto will change the world soon

I know I've asked it before but I am going to ask again cause I really need to know. How can I get my entire steem transaction history in a way that can be used as raw data for tax calculations?

i am korean

i have invested ADA

Open my account

ADA income 10,0000 $

That's pretty cool to know thanks for the tips by the way :)

If I bought 1.0 LTC at $50 in august and store it in wallet A
I also bought 1.0 LTC at $350 in December and store it in wallet B
I send the 1.0 LTC from wallet B on December 31st to an exchange and sell 1.0 LTC for $225
DO I REPORT A LOSS OR A GAIN FOR TAX PURPOSES.
I ask this stupid question because lets apply this to there is no wallet B. Instead wallet A has both LTC's bought.
Which LTC was sent? was it a mixture of both? In 2018 should I start figuring out which crypto was bought most recent so I only use the most recent to trade with? Is that even possible in a single wallet?

Wallet B was a lost, even though it was more than wallet A, how you keep track of that can be difficult, My exchange however does list all my transactions, figure out what transactions were Gaines, and what was a lost will be heard. I would guess, this is where people will fudge a bit, because it would be hard to prove which is which. Reality is, smaller transaction will not be examined, at least for a while, transactions above I think $9k will likely have to be reported by the exchanges.

However, I think would will come of this, is countries setting up untraceable/ Tax free exchanges. and a continued, attempt to block them.

Thanks for the info, C.I. You always provide sensible information. Just started to follow- your YouTube channel brought me here. Great, top-notch content, my man. keep em' coming.

Personal business revenue is reported on a Schedule C form to file with your 1040.

The good news about this is that the IRS just paved the way for you to deduct that nice new Macbook Pro, as well as a percentage of your home (i.e. your home office) and all utilities and insurance applicable to said sq footage of space where you do your blogging, as ordinary and necessary business expenses. Keep in mind that people that report the business use of their home are more likely to get audited, which may shed light on other cryptos you own.

If they're going to force you to play their game, make sure you're using all the rules to your advantage.

Hey @crypto-investor, I'm new to the cryptocurrency space so I apologize for this basic question. Let's say I used $1000 to buy bitcoin, then 3 hours later I make a $100 profit. If my goal is to use bitcoin to trade alt coins, would I still be making a profit if I traded bitcoin to alt coin without cashing out bitcoin to USD first?

Does anyone know:
If I have a mining operation going on in USA (colocation service I am thinking about using), but i'm not a resident neither a citizen of USA. Will I still need to pay tax on this?

When it comes to taxes with crypto, should I keep track of the fees I paid when buying crypto? Does it count for anything or would I be wasting my time keeping track of that as well

@crypto-investor
Excuse me for not following up on your previous reply, I seem to have misplaced it :/

I wanted to pick your brain further about what your thoughts are of theology in a contemporary context. You expressed, with brevity, your story of being lost and then found, and also alluded that(although you tend not to indicate) God influences a lot of your interpretations of data etc.

It's the last premise that I find quite interesting, and if you would indulge me(and perhaps others that are interested) how in fact that takes place.

On the other hand, I do also believe that such information can be of a very personal nature - and so if that is the case I just want to thank you for your interaction thus far!

All the best,
C

So, we have listened to some of your videos and enjoy your content very much. We have similar interests in that we also follow Crypto. We think you may really like what we have going on @revelationquotes

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Doing taxes this year will be much more painful.

My local Xerxes Blockchain Group buddies attended a user group where an individuals who were advising some of the early adopters in Bitcoin and they were saying each transaction - exchange buy/sell, shapeshift of currency, coffee purchased - was taxable and required profit / short or long term gain consideration.

Almost fell out of my chair...

IRS is under budgeted and staffed and millions aren't paying and there is no clear regulations or guidance from them. There will be eventually and we just need to hope it's not retroactive.

I'm paying my taxes. I'm proud to be an American at the end of the day and I made more than enough last year to pay my unfair share.

Isn't Bitcoin stateless? Can a stateless thing be taxable? Is Bitcoin the same as a stock? You know that John McAfee says it's not like a stock?

#bitcoin
people talk about bitcoin but i have not understood

#bitcoin
why people talk about bitcoin

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