March 2021 – Cryptocurrency Tax Experts Answer Your Questions Table of Contents With the federal tax deadline returning to its regular date of April 15th in 2021, you are probably thinking about how to report your crypto transactions on your tax return.The IRS still does not provide the most explicit guidelines on crypto taxes, and since there are many caveats, you likely have some questions.Well, at BitIRA, we’ve got you covered, as we have partnered again with the best crypto tax specialists to answer all of your questions.You sent us some great tax questions (for the 2020 tax year), and we worked with these excellent crypto tax pros to get them answered! (For additional answers to crypto tax questions, be sure to check out our 2020 tax expert Q&A.) You can read the bios of all the crypto tax specialists at the bottom of this article.Note: Readers should consult a qualified tax professional for advice specific to their situation.We hope this Q/A can help you ask the correct questions when you consult professional advisors, please do not take this as advice, consult a professional.
Article Content – DeductionsInactivityDigital IRAsTaxable EventsRecording, Reporting, RequirementsSpecial Considerations Tax Specialist Bios Ask a Tax Question Got a crypto tax question you’d like to have one of our partner tax experts answer in a future post? Submit in the form below.Deductions “If I have a cumulative amount of BTC bought at different times, some held for over two years and some bought within a few months, can I selectively choose which BTC to sell in order to avoid capital gains tax?” It depends on what cost basis allocation method you use.Currently, there are only two methods allowed by the IRS: (1) First In First Out (FIFO) and (2) Specific Identification.If you use the specific identification method, you will be able to pick and choose which tax lot you want to use for each sale.
If you use FIFO or another method such as LIFO (which is not allowed by the IRS), you cannot freely pick and choose the tax lot you want to use.Please note that once you pick a basis allocation method, you are required to use it consistently for all the years, unless you file an accounting method change and get IRS approval for changing to a new method going forward.
Alternatively, you can file an amended return for all the prior years (if the statute of limitation is still open) and apply the new allowable method to all the years.–Sharon Yip, Crypto Tax Advisors “Is it true that if you buy back sold cryptocurrency within so many days of its sale it can decrease your taxes in some way?” I think you are referring to the “loss harvesting” strategy.
Unlike for stocks, currently, there is no official guidance requiring the “wash sale” rule to be applied to cryptocurrency trades.
Therefore, you should be able to sell crypto at a loss when the market is going down, then buy it back right away or within a short period at the same or a lower price.That way, you don’t actually lose any money, but you get a realized capital loss which you can use to get a tax deduction and/or carry it forward to offset future capital gains.–Sharon Yip, Crypto Tax Advisors “Is there any way under US tax codes to claim losses (in order to offset stock capital gains) regarding a token that cannot be sold because it has no current liquidity (since there is a lawsuit with SAFT buyers)?” Unfortunately, you cannot claim a loss because, in current US tax loans, lost coins are considered personal casualty loss.Casualty losses are not tax-deductible at the moment.However, you won’t have to pay anything taxes on capital gains either.
–Carolina Martinez, Be Pro Accounting There is currently no good or easy way to recognize a capital loss on tokens that can’t be sold, were hacked, were sent to a bad address, or have lost private keys.Some of these things might fall under a theft/casualty loss, however, due to the Tax Cuts and Jobs Act, these losses are suspended until 2025.There are some more aggressive strategies that may be possible around abandoning property, but each case there would depend on individual facts, circumstances, and risk tolerance.–Matt Metras, MDM Financial Services Inactivity “Holding BTC vs trading BTC.
Is the former tax reportable or is it only the latter? In other words, if one merely holds BTC, not trades it during the year, is it still taxable or tax reportable?“ Purely holding BTC does not constitute a taxable event.
You do not realize a capital gain or loss until you dispose of (or get rid of) your BTC by selling, trading, or spending it.However, if you received airdrop tokens or interest rewards from holding your BTC, these interest and reward payments would be considered taxable income and would need to be reported as such.–David Kemmerer, Cryptotrader.tax No, if you are merely “holding” aka holding, there is no reporting requirement.This is no different from holding onto your Apple or Tesla stocks.You are not taxed on unrealized gains or losses.
The same concept applies to cryptocurrency.–Nicole Green, NGG Tax Group “If I only buy and hold, should I check ‘yes’ on the 1040 question?” This is an easy question that should have an easy answer, but doesn’t.
The form 1040 instructions imply that you only buy and/or hold crypto, you do not need to check yes.However, the instructions and the form itself contradict each other.The form says “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” If you were to buy crypto, it is unlikely you are not subsequently receiving it or acquiring a financial interest in it.To further complicate matters, different IRS officials have publicly given conflicting statements on this issue.
My advice is if there’s any doubt, the potential issues of checking “yes” are much smaller than checking “no.” –Matt Metras, MDM Financial Services Digital IRAs “If I hold crypto in an SDIRA, do I have to report to IRS?” If you hold crypto in a self-directed IRA account, you don’t need to pay taxes until you take a distribution from the account.Tax reporting rules for SDIRA accounts investing in crypto are the same as those investing in other assets such as stocks and mutual funds.For a regular (i.e., with tax-deductible contribution) IRA account, all the distributions are subject to income tax, while distributions from a Roth IRA account are usually nontaxable as long as you meet the requirements for qualified distributions.–Sharon Yip, Crypto Tax Advisors “I rolled over my TSP into a BTC IRA.
Are there any tax implications for this type of rollover? Do I claim fees or custodial expenses on my taxes?” As long as you did the rollover within the allotted time period there shouldn’t be any problems.IRA’s are tax-advantaged so normally you would not be reporting anything related to the income within those on your tax return until you start making withdrawals.–Zac Mcclure, TokenTax Taxable Events “If I transfer my cryptocurrency by downloading it to a prepaid debit card (as opposed to exchanging it for fiat currency), is that a taxable event either at the time of download or expenditure?” Downloading cryptocurrency is generally not a taxable activity, because essentially the property (coins) are transferred from one holding bucket to another.It would be analogous to transferring money from your bank account to a debit card.However, if the coins are exchanged to fiat at the time of the download, that would be taxable, as the property (coins) have been traded in for a value.The expenditure of the coins is a taxable event as the property (coins) are exchanged for a different property.The user must determine at what point did the property (coins) transfer to some other item of value, at the time of the download or at the time of the expenditure.For example, if a user downloads a coin into a debit card and the debit card is loaded with fiat cash, then at the time of the download is when a reportable event occurred.
But, if the user transfers a coin to the debit card and the coin remains in the debit card in cryptocurrency denomination until the card is used to purchase a cup of coffee, then at the purchase of the coffee is when the reportable event occurred.The user must keep track of the value of the coffee to determine what was received in exchange for the coin to determine the proceeds from the transfer.–Ani Galyan, Galyan Law “I’ve purchased BTC on PayPal and would like to make a consumer purchase with that BTC.Are there any tax implications?” Records must be kept for the purchase of the BTC to establish the basis on the property (coins) received.The purchase of the coins does not have tax implications as it is not a reportable event.However, when the bitcoins are used to make a purchase of some item, then the user must report this activity because what the user has done is traded the property for another.
If the property received is valued more than the cost of the property (BTC) given up then the user has a reportable gain.For example, if BTC was purchased for $100 in April, and then in May the BTC was used to purchase a sofa for $300, then the user has essentially traded an item with a cost basis of $100 for something worth $300.
The user has gained $200, and that gain is income subject to tax.–Ani Galyan, Galyan Law Purchasing BTC with USD is not a taxable event.However, you should keep track of your cost basis and the amount spent – or used a software like TokenTax or others to do it for you- so that you get credit for the cost basis as a reduction of any capital gain when you eventually spend the BTC or sell it.Otherwise, you could be overreporting your gains and overpaying your taxes.
–Zac Mcclure, TokenTax “If I buy and sell the same crypto multiple times a day am I taxed every time I sell?” Any time you sell crypto, including the same coin multiple times in a day, you have a tax event.This could be a loss, a gain, or a zero net transaction.So you are not necessarily paying tax on every sale, but you are calculating the gain or loss on every sale and paying tax on the sum of all the gains/losses for the year.–Matt Metras, MDM Financial Services “I have a family member that wants to transfer a sum of money made from their crypto tradings into my savings account.
This family member is not based in the U.S.
and she didn’t use a U.S.
account to trade, but I’m in the United States.Are there any tax implications for this?” You might have to pay tax for Gifts received or can be counted as an income or can be classified as a loan.It all depends on the nature of the transaction (the reason you are receiving the coins).–Carolina Martinez, Be Pro Accounting If the transfer is a bona fide gift, there is no tax due from the recipient of the gift.
Additionally, there are no special requirements related to crypto.However, gifts over a certain threshold may need to be reported to the IRS.
See IRS form 3520 for additional details.–Matt Metras, MDM Financial Services “I moved cryptos across exchanges.Does that constitute a sale or have any tax implications?” Moving crypto from one wallet you have possession over to another wallet you have possession over does not constitute a taxable event as it is not a disposal of your crypto.Transferring coins between your wallets is not a taxable event and you do not realize any gain or loss.
–David Kemmerer, Cryptotrader.tax No, generally transfers between accounts are non-taxable events.This also includes transferring from a hot wallet to a cold wallet.–Nicole Green, NGG Tax Group “I use an automated trading bot for my BTC trades.I can see only the profit I make on each trade in my transaction history.
I don’t know how much bitcoins were bought or sold, or the exchanges where these trades were done.If I have thousands of just profit transactions.How can I properly complete the 8949 tax form?” Your automated trading bot should give you reports on the amount of BTC sold or purchased for each trade.If they do not, you should reach out to their customer support team and request this transaction history data.You need this information to properly report your BTC disposals and capital gains on your taxes.–David Kemmerer, Cryptotrader.tax You can’t properly complete F8949 just based on your gains, you would probably be doing yourself a disservice.Here is why: First, and probably the most important is that you need to know if those gains are long term (held over 12 months and 1 day) and taxed between 0% and 20% or short term (held less than a year) and taxed at ordinary rates.For example, depending on your tax situation, the rates for short-term gains could be as high as 37% since short-term gains are taxed at whatever tax rate you fall under for income tax purposes.
Second, the form requires a description of your trades – (though this is less significant as you can summarize your transactions), and also information on the basis (cost) and sale price.–Nicole Green, NGG Tax Group “Are crypto-to-crypto trades taxable?” Yes.Trading one cryptocurrency for another is treated as a disposal, and you realize a capital gain or loss in the crypto that you traded away.This capital gain gets reported on IRS Form 8949.
–David Kemmerer, Cryptotrader.tax Recording, Reporting, and Requirements “In what states do you have to pay state taxes on cryptocurrency?” Taxation of cryptocurrency activity can range from ordinary income to capital gains income.Reporting the taxable activity will depend on each state and the state income tax law.What tax rate applies to the different types of income would also vary depending on the state.Certain states do not tax individuals, and in those states, the income from cryptocurrency activity may be excluded from taxation.
–Ani Galyan, Galyan Law All states that have an income tax (i.e.every state except AK, FL, TN, WY, NH, TX, WA, NV, SD) –Zac Mcclure, TokenTax “I have been investing in cryptocurrency over the last 3 years and was unaware that some of my trades should have been reported on my taxes.Are there any implications for not amending my previous tax returns to report those trades?” Yes! If a return is not amended then what you have is underreporting of income or in some cases a loss.Underreporting of income can subject the taxpayer to accuracy-related penalties, and in some cases criminal exposure.
If you have an error or an omission in reporting, you must consider whether an amended return is appropriate.The IRS has begun sending letters to taxpayers with virtual currency transactions who may have failed to report income from these transactions.If you have received one of these letters from the IRS, and believe that you have underreporting of income and tax, then it is advisable you speak to a tax attorney to determine what your obligations are in response to the letter.–Ani Galyan, Galyan Law “How do I report forks on my taxes?” Revenue Ruling 2019-24 published by the IRS in October 2019 makes it very clear that any new cryptocurrency received by airdrop following a hard fork should be treated as ordinary income, measured in USD based on the fair market value of the crypto at the time of receipt (i.e., when it landed in your exchange or wallet account).
–Sharon Yip, Crypto Tax Advisors “I was recently introduced to a BTC investment company.They pay out weekly returns on my investment.How would taxes work since I’m not buying and holding or personally trading the money?” Any interest or dividend income you earn from the investment should be reported as investment income as soon as you have access to the income (i.e., it landed in your account and you have the right to withdraw it or do something else with it).The amount of income is measured in USD and if you receive the income in crypto, it is based on the fair market value of the crypto at the time of your receipt.Depending on how the investment program is structured, you may be able to claim some or all of the coins you received as a return of capital until you recover all the investments you made.Please consult your tax advisor for advice about your specific situation.–Sharon Yip, Crypto Tax Advisors “Can I use the crypto that I purchased in December as my cost basis for crypto that I sold in August of the same year?” No, the cost basis used for each transaction needs to be based on the date and time that each transaction happens.For example, for the crypto you sold in August, you need to use the cost basis based on the date you first acquired the sold crypto and for the crypto you bought in December, you will use the cost basis of December when you sell it.
–Carolina Martinez, Be Pro Accounting Typically, no.With some rare exceptions, you need to own the asset you are selling.Basis can not be established after the transaction is complete.–Matt Metras, MDM Financial Services “Is there a particular accounting method that should be used to determine crypto gains?” There are different methods that you can use.
One of the most commonly used is FIFO.–Carolina Martinez, Be Pro Accounting IRS Cryptocurrency FAQ #40 says by default crypto trades use First-In, First-Out (FIFO).However, taxpayers may use “Specific Identification” if they meet the criteria under IRS FAQ #39: (You may identify a specific unit of virtual currency either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific virtual currency, such as BTC, held in a single account, wallet, or address.This information must show (1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.) –Matt Metras, MDM Financial Services Special Considerations “Is there an app or program to track my crypto investing outside of an IRA for taxes?” Yes, apps like CryptoTrader.Tax can track all crypto investments and tax implications associated with them for any crypto held outside of an IRA account.
You can create an account for free to test it out.–David Kemmerer, Cryptotrader.tax There are many.Here are a few softwares: ledger vault, coinbase custody, fidelity digital assets, ambivault, anchorage, block.io wallet.Here are a few apps: blockfolio, cointracking, cryptocompare and gem.–Nicole Green, NGG Tax Group “What’s the easiest method to do cryptocurrency taxes?” The easiest method for getting crypto taxes done is using specialized cryptocurrency tax software like CryptoTrader.Tax.Crypto tax software works by connecting with your exchanges and crypto platforms to pull in your previous transaction history and auto-generate your required tax forms based on this data.You can generate your gains and losses tax forms in a matter of minutes.–David Kemmerer, Cryptotrader.tax FIFO is probably the easiest and most preferred method by the IRS for cryptocurrency trading.
–Nicole Green, NGG Tax Group “How will the IRS even know if I have crypto?” First of all, there is a required question on the 1040 asking if you have engaged in any crypto transactions.Falsely answering this question would be considered perjury and can create a criminal liability issue.
Secondly, some exchanges provide information to the IRS.The IRS won’t say which ones or what information is submitted.
Also, even if the exchanges you use don’t cooperate with the IRS now, it’s possible they will before the statute of limitations on your return expires.Lastly, if you ever want to convert that crypto back into fiat, you’re going to want to have an established basis to avoid being taxed on the full amount.–Matt Metras, MDM Financial Services Tax Specialist Bios We’d like to thank the crypto tax professionals who answered your questions for the 2020 tax season.Below is the professional background information of each specialist.
Ani Galyan, Galyan Law Ani Galyan is an attorney and Certified Tax Specialist with the State Bar of California.In addition, Ani is a certified public accountant admitted to practice in California.She also holds a Masters in Tax Law (LL.M).Ani was recognized as Southern California Super Lawyers “Rising Star” in 2016 through 2019.Ani focuses her practice in the area of tax law for federal, state and local tax compliance, tax disputes, and tax crimes.Part of her practice focuses on advising clients on cryptocurrency IRS reporting obligations and navigating the complex reporting requirements for cryptocurrency investors.Ani obtained a B.S.degree in 2005 from USC in Accounting, a JD, Cum Laude, from Loyola Law School in 2012, and an LLM with Highest Distinction from Loyola Law School in 2012.
Sharon Yip, Crypto Tax Advisors Sharon Yip, CPA has over 20 years of tax and accounting experience in public accounting and corporate.She received a Master of Science degree in Accounting – Tax Consulting from University of Virginia, and she worked as a senior tax manager at Deloitte and later a corporate tax director at a Fortune 500 company before she started her own tax practice in early 2018.Sharon became a crypto investor and blockchain enthusiast in 2017.
Since then, she quickly became one of the top crypto tax experts in the U.S.She published articles on Bloomberg Tax and several other places, and she was interviewed by news media such as CoinDesk and cryptonews.com.Sharon is a founder of Crypto Tax Advisors, LLC and a co-founder of Polygon Advisory Group, LLC.
She specializes in serving crypto investors with complicated transactions and blockchain companies in need of crypto accounting assistance.Carolina Martinez, Be Pro Accounting Carolina Martinez, founder of Be Pro Accounting, LLC, became interested in cryptocurrency through her husband, who is a cryptocurrency trader, investor, and miner since the early stages of cryptocurrency.Carolina not only became a cryptocurrency investor herself, she also got specialized in cryptocurrency accounting and tax.At Be Pro Accounting, we help our clients with their cryptocurrency accounting and tax needs and keep their minds at ease.Zac McClure, TokenTax Zac had an eclectic career before starting TokenTax.
After a 2-year stint in Investment Banking, he joined Teach For America where he taught math infused with personal finance and entrepreneurship – two passions that make up the foundation of TokenTax.The company currently works hard to teach clients about advanced tax topics such as accounting methods, tax-loss harvesting, retirement planning, and portfolio diversification.Previously Zac also worked for social enterprises in Zimbabwe, Zambia, Madagascar, and India, as well as Social Impact investment firm Imprint Capital, Bain, and Elsevier.He earned an MBA from Wharton, and also holds degrees in International Finance and Accounting from USC.Matt Metras, MDM Financial Services David Kemmerer, CryptoTrader.Tax David Kemmerer is the Co-Founder and CEO of CryptoTrader.Tax, a cryptocurrency tax software platform built to automate the entire crypto tax reporting process.Today, tens of thousands of crypto investors use CryptoTrader.Tax to automate their tax reporting.
Nicole Green, NGG Tax Group, Inc.Nicole Green, MST is a Principal at NGG Tax Group, Inc.with over 15 years of tax experience.She provides compliance, consulting, and audit representation services to taxpayers and other advisory firms.Nicole also guides US and foreign nationals on a wide range of cross-border transactions to help unravel the complexity of the US tax system.Nicole is a crypto enthusiast and investor who holds a master’s degree in Taxation as well as a Certified BTC Professional Certificate.Nicole is an IRS Enrolled Agent which allows her to represent clients in all 50 states.
Note: The information presented in the article above is intended for educational purposes only.It is in no way meant to offer financial advice, and specific guidance about how to properly pay taxes in each individual case should be sought from a certified accounting professional.Looking for CPA Crypto professionals that might be able to help with your taxes? Check out our growing directory of professionals.Source link.
