How to manage your tax reports when trading crypto

In most jurisdictions all of your income, no matter the source is taxable. This includes of course your earnings from employment, but also any income you make from any properties you rent, from your investments like ISAs, and your trading or stock investment returns.

The income you generate from Crypto trading or investing is, as you would expect, taxable too. The rules can be tricky to understand. They do change depending on the jurisdiction you are residing in, but here are the main rules for U.S residents.

US and tax rules on crypto

In the US, as with everywhere else, some confusion in the arena of cryptos also applies. The Internal Revenue Service in its most recent notifications notice 2014-21 has categorized crypto as assets and would, therefore, be taxable in the same way you would be taxed on property. The taxpayer must therefore declare all transactions for the current tax year. The US taxpayer must keep records of every single transaction they undertake, including buying, selling, and exchanging.  

The IRS is pretty serious about this and actually sent letters of warning to over 10,000 US citizens that it believed has “potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.” They are not playing and threaten taxpayers with the prosecution and even imprisonment in some cases for what they consider tax fraud on this matter.

How are cryptos taxed in the U.S?

There are a variety of ways that crypto transactions are taxed in the US. They have used Bitcoin as their test case and the rules on Bitcoin transactions mean that buying and selling bitcoin is taxed on a capital gains basis, this also includes profit resulting from exchanging and investing in this crypto. 

For instance, if you bought a Bitcoin for $1000 and sold it for $2000 then as you would expect, you are liable to pay capital gains tax on the $1000 profit.  Miners also come under the spotlight of the IRS, with mining profits considered taxable. Inheriting or receiving Bitcoins as a gift is subject to the same rules as cash.

Where things start to get complicated in all jurisdictions is where the volatility of the asset’s price comes into play. Let’s take Bitcoin as an example. Bitcoin is known to have had wild price swings, even up to as much as 10% in one day. Let’s say you own $10,000 of Bitcoin and its price swings from one day to the next, how do you mark the value of your holdings?  The answer is that there are no clear rules on this and that you should try to report on a day that your Bitcoin is in a dip.

The final complication is how to report your taxation. In the US you have both Last In, First Out (LIFO) and Highest In, First Out (HIFO). With the first being able to help you minimize your taxes, however, the IRS rarely agrees to this method, opting rather for the latter.

The bottom line:

If you don’t use an accountant, the best thing you can do is use a software package that specifically focuses on crypto, and Atani, which is a leading digital exchange, actually has a built-in 1-click tax reporting system for free. This certainly simplifies the collecting and reporting of all your transactions and allows you to customize and download reports. Tax is never fun, but with a tax tracking package like this one, it certainly helps to ease the burden.

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