Understanding how these transactions are carried out is vital for the purpose of complying with tax regulations laid down by the IRS. As per the notice issued by the IRS, virtual currency is treated as property for taxing purposes. This implies that general tax principles applicable to property transactions will apply to cryptocurrency exchanges.
The basis of calculation is a massive challenge faced by crypto traders and their accountants. The investors are not able to generally rely on Form 1099 for the reconciliation of basic information or support. In the absence of records, the traders have to rely on third parties for getting assistance in compiling tax holdings data. It is critical for investors to maintain independent tax records for ensuring proper reporting of taxes.
Complex transactions reconciliation
Gains and losses on any trades are calculated as discussed earlier. Most major tax platforms allow the user to extract the trade details either in the form of an API link or by downloading a CSV file. An expert accountant can help manage more complex situations, such as:
- Investment in ICOs that are not tradable any longer
- Taxpayer losing private keys
- Lost coins as the exchange were hacked
- Used bots for performing trades
- Trading using margin
- Tried multiple crypto tax platforms and the reports don’t match
The abovementioned factors indicate the need to rely on an expert or find an alternative solution to get out of situations where no guidelines have been formulated yet. Various scenarios have been discussed in the subsequent subheadings.
Manually importing exchange information
The taxpayer must upload a CSV file or an API connection for every exchange that has been used for trading cryptocurrencies. Every API connection must be synced appropriately with the tax software being used. It is important to review the trade information in the report before finalizing it.
The taxpayer can manually enter ICO purchases if there is no secure API link or CSV file for a particular purchase. It is essential to account for the cryptocurrency being spent on ICO purchase.
Missing transactions for gifts received or given
The taxpayer can manually enter the particulars in this case. The nature of the transaction would be described as “gift” in this scenario.
Coins bought from someone else’s account
If somebody else has purchased crypto for the taxpayer, then they must include the transaction information while evaluating taxes. The taxpayer can enter this information manually.
Crypto mined or received as a reward
If the taxpayer has mined crypto or has received it as staking rewards, then it is important to account for this information as well into the tax estimating tool.
Stolen or lost coins
In this case, the taxpayer can manually enter the information pertaining to the transaction regardless of the reason behind the loss. Not doing this makes the software system assume that the taxpayer is still holding the coin and it will categorize it as sales in the portfolio. Entering stolen or lost coins while documenting transactions can make a major difference when evaluating taxes.
It is vital to keep track of every transaction and related details. This applies to private keys, addresses, altcoins, and digital art. The taxpayer must record taxable income and all receipts with cryptocurrency just like regular taxes. This will make managing crypto taxes much simpler. Once the taxpayer has detailed records, it would be easier to estimate how much is owed.
No longer existing coins
The past two years haven’t been kind to some of the ICOs as many of them lost their value after hitting exchanges. Many exchanges delisted certain coins that have experienced low liquidity. If the taxpayer invested in tokens from an ICO that no longer exists, then they must have to find a way to either dispose of such coins or estimate the loss and incorporate it in the tax report.
For reconciling crypto taxes accurately, a full history of each transaction performed is required. Expert accountants can help to fill in the gaps and help file taxes accurately.
Bankrupt or hacked exchanges
As crypto is still a nascent industry, holding coins in exchanges can be risky. One can hold all coins in the wallet. This is to avoid losing coins. Losing coins because of an exchange getting hacked can create a gap in crypto transactions. It is important to reconcile this information for tax purposes. This data will account for losses in the taxpayer’s transaction history and can be used as ordinary income or to offset capital gains. Many accountants help traders create synthetic trades for filling in the missing details. These are done in a conservative manner and pass IRS scrutiny.
Margin trading and staking in specific exchanges
Experienced traders may have relied on bots for executing thousands of trades or may have also margin traded on various platforms. In the case of margin trading, the taxpayer needs to evaluate transactions with more care when estimating taxes.
Accountants can help manage millions of trades easily. They can split trades and process them for ensuring cost basis are pretty accurate. Margin trading poses a massive problem to crypto traders who aren’t sure of how to estimate their crypto taxes. Using software for evaluating crypto taxes and relying on an expert can help extract all the missing data from exchanges to create an accurate tax report that doesn’t invite any scrutiny from the IRS.
Are Crypto Donations and Gifts Taxable?
The IRS has outlined that donating cryptocurrency will not attract taxation as imposed on a capital gain or loss. Also, in case of donation of cryptocurrency with a holding period greater than a year, the taxpayer can claim a deduction that is equal to the market value (fair market value) of the asset at the time when it is donated.
In case the asset has been in possession for less than one year, one can still claim deduction benefits however, they will not be as much as the fair market value of that particular cryptocurrency on the date of the donation.
Crypto gifts can be considered as ‘gifts’ for taxation purposes if they are given without receiving anything in return or receiving something which is lesser in value than the cryptocurrency gifted. Primarily, if the fair market value of the ‘gift’ is greater than or equal to the adjusted basis at the time the cryptocurrency is gifted, the recipient will take over the holding period of the asset that has been gifted.
Comparing other crypto tax tools results
There are several crypto traders who rely on numerous crypto tax tools available on the web. They would certainly face this issue of obtaining different results on various tax platforms even after inputting the same data. This obviously doesn’t guarantee peace of mind if the user is trying to get accurate results and to withstand tax audits.
An expert helps get through this as they can submerge in the reason that is leading to different outputs on various crypto tax software platforms. Reverse engineering transactions can help identify where the variances are originating from. There are specific software tools that can reverse engineer transactions.
These are many complex situations that have to be accounted for when generating a crypto tax report for filing taxes. Accurate software and guidance from an expert can help navigate through the issues pretty easily. The taxpayer must account for every single cryptocurrency transaction performed in a year. This will help evaluate taxes accurately and avoid an IRS audit. Moreover, the accountant can also be useful for defending in case of a crypto audit.