A Guide to Paying Taxes on Cryptocurrency

graphic of bitcoin profits and losses

With the new craze of investing in cryptocurrency sweeping the world, questions arise about if they are taxed. The answer is yes. 

In this article today, I will discuss the laws that are laid out for how cryptocurrency is being taxed. I will then go into the importance of reporting all crypto transactions and how the IRS is cracking down on enforcement and reporting. The government is taking the reporting of cryptocurrency very seriously, so if you are one of these people trying to strike it rich with crypto, read on.

 

How Does the IRS View Cryptocurrency?

Cryptocurrency is considered property or an asset to the IRS. This was declared in 2014. So, you must pay taxes on cryptocurrency gains when you dispose of the asset, much like stocks. This includes when you sell the crypto, trade for another form of cryptocurrency, or use it for payment of goods or services.

These different forms of crypto activity will not have one uniform tax rate.

If you received cryptocurrency as income, by mining it or as a promotion, it will be taxed at your ordinary-income tax rate.

If you dispose of or sell cryptocurrency, the profits will be taxed at the capital gains rate.

If you held the cryptocurrency for over a year, it will be taxed at a long-term capital gains rate.

If you held the crypto for under a year, it would be qualified as a short-term loss and would be taxed at your regular income tax rate. 

This is where it is important to keep good records of transactions and determining your cost basis. The cost basis is the original value of an asset for tax purposes, usually the purchase price. This value is used to determine the capital gain, which is the equal difference between the assets cost basis and the current market value.  

The good news and why it is so important to keep track you can write off losses to offset your capital gains or claim a capital loss deduction. This means when you sell your cryptocurrency if there is a profit that profit is taxable. If you sell it for a loss, then it still needs to be reported as a loss. 

The good news is you can deduct capital losses on bitcoin just like you can do with stocks. These losses can offset other capital gains and sales. If you are showing a loss after all gains and losses are tallied up to $3000 can be written off as a loss towards your other income. Unfortunately, if you are robbed of your bitcoin new tax rules do not allow you to take this as a deduction for personal loss.

 

The IRS Is Enforcing Crypto Reporting

Over the past few years, the IRS has sent letters to crypto taxpayers and they have sent IRS summonses to Coinbase, Kraken, Circle, and other firms that handle crypto transactions to turn over their records to the IRS for clients that had more than $20,000 in transactions in any year since 2020. 

During the 2020 tax year, they have added a question on the 1040 that asks, “At any time during 202 did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency.” The form gives you the option of yes or no. When you sign this form, it is under the penalty of perjury. It can be viewed that adding this statement is almost like setting the trap for very severe consequences in the future if the taxpayer is untruthful. 

By checking the box incorrectly, it can be said that there is per se willfulness if found to have held bitcoin. Willful failures carry much higher penalties and have an increased threat of criminal investigation.

The latest step was the announcement by the US Treasury Department that they plan to impose reporting requirements for crypto. Banks, financial institutions, exchanges, custodians, and crypto payment services are slated to have to report the IRS. 

It seems the rules they are setting up will be like the rules surrounding cash transactions even though the IRS had stated in 2014 that crypto was property, not currency. It is expected that businesses that receive more than $10,000 in cryptocurrency in a year will have to do a transaction report. This is the same as the rules set for cash transactions. When these cash transactions are not reported the laws make it a crime and the IRS Criminal Investigations Department would become involved. 

With the suspicion that people will try to structure around the reporting of crypto as they have been doing with cash income laws may be set in place with similar consequences for crypto making it quite dangerous not to report. With the possible consequences ranging from substantial penalties and fines to possible jail time, I cannot reiterate enough the importance of keeping good records.

 

How to Keep Good Cryptocurrency Records for Tax Purposes

With record keeping being of such importance, there is a need to know what you should be keeping track of throughout the year. It all starts from the initial acquisition of the crypto. Make sure to keep track of how much you paid for the crypto or mined it, this is the cost basis. When you are buying and selling stocks your broker would send you a 1099-b with all this information. With crypto at this point, this is not always done. The IRS is pushing for further enforcement, so this type of reporting begins to happen but for the time being, you must keep your own records to be safe. 

A lot of the investing platforms and exchanges are already starting to do this, so it may make sense to use those for your trading. If you are not using one of these platforms or exchanges, some software companies are emerging with programs that will scrub blockchains to detect transfers between your wallets whether on an exchange or not and will give you reports of all transactions related to those wallets. With these types of records, the tax filing process for cryptocurrency is still complex but these records will make it easier. Also keeping these detailed records and putting in the effort will limit your risk with the IRS.

 

How Do I File Cryptocurrency on My Taxes?

When filing your taxes with cryptocurrency income I would highly recommend hiring a true tax professional. As you see the laws are constantly changing and this income on tax returns is being watched by the IRS. Also, there are many ways that tax liability can be legally minimized by somebody who knows tax law. Enrolled Agents and CPAs are the ones who can act as tax preparers and are required to have the educational background to best serve you. 

If you decide to file this on your own it is especially important to know where and what forms are needed for the filing.  A great article in Forbes has listed and described these forms as follows:

Form 8949: This form logs every purchase or sale of crypto as an investment. This should include the total number of coins, the day and price you bought, the day and price you sold, and your gain or loss for each transaction.

Schedule D: This form summarizes your total capital gains and capital losses from all investments, including crypto.

Schedule C: If you received coins from mining, you need to disclose whether you received them as a business or as a hobby. If you are running a crypto mining business, you would report this income on Schedule C, and deduct your expenses. Your expenses might have to be extremely high, though, to offset any extra self-employment tax you would face if you counted your mining as a business instead of a hobby.

Schedule 1: If you report your crypto mining as a hobby, you will report this income on Line 8 of Schedule 1. You will not owe self-employment tax, but you become more limited on what you can deduct as an expense. 

It is not only important to make sure the correct forms are used but it is especially important to hire a tax professional to make sure that you are utilizing everything within tax law to limit your exposure to tax debt.  As discussed earlier in this article one thing that can be done is correctly offsetting any gains with losses to keep the taxable portion as low as possible. 

Another thing you would not want to miss would be the possibility to utilize expenses. If you are mining crypto, there are some expenses involved in this process. These expenses can be considered such as computers, servers, electricity, and internet. These expenses can be deducted from your income before being taxed saving you a lot on what you owe.

In conclusion, the once thought of as the “wild west” world of crypto is slowly becoming very monitored and regulated. The one thing that has not seemed to change is there is still a lot of money to be made in the acquisition and sale of cryptocurrency. I by no means am not trying to dissuade anybody from dabbling into this market. 

The major point of this article was to prepare and make people aware of the ever-growing seriousness of reporting this income made in this market. Keep on making that money, but make sure to shield yourself by hiring the proper tax professional and making sure things are done 100% correctly to enjoy the profits with no future worries about the IRS coming after you in the future.

 

An Introduction to G7 Global Tax Reforms

G7

One of the biggest issues with our economy is keeping businesses within the United States. Obviously, corporate tax dollars are important to the US economy. There has been a long and contentious battle between nations, some offering low to zero taxes to lure businesses. 

Well, earlier this month there was a major agreement in principle between a group called the G7. This agreement would set a global corporate tax of 15% on all earnings for all nations. The group also said that the biggest companies should pay taxes where they generate sales not just where they have their physical presence. If this is finalized this would represent a significant development in global taxation. 

After the G7 summit, U.K. Finance Minister Rishi Sunak announced in a video on Saturday. As seen on CNBC “G7 Finance ministers today, after years of discussions, have reached a historic agreement to reform the global tax system, to make it fit for the global digital age and crucially make sure that its fair so that the right companies pay the right tax in the right places.”

In this article today, I will start by explaining what the G7 is and why the agreement between this small number of countries is so significant in further negotiations at summits with the rest of the countries that will participate. I will explain some points of benefit this will have for not only our economy but also the effects that it can have on other countries across the world trying to rebuild their economies since the coronavirus pandemic. From there I will expand on the process and a long road ahead to getting the rest of the world in on this agreement.

 

What is the G7?

G7 is short for Group of 7. This is an informal club of wealthy democracies consisting of Canada, France, Italy, Germany, Japan, the United Kingdom, and the United States. The heads of these governments as well as representatives of the European Union meet annually at the G7 summit. As of 2018, the G7 represents 58% of the global net wealth ($317 trillion), more than 46% of the global gross domestic product based on nominal values, and more than 32% of the global GDP based on purchasing power. 

This group was started informally during the 1973 oil crisis when US secretary of Treasury George Shultz convened a gathering of finance ministers from West Germany, France, and the United Kingdom. They met in the Library of the White House and because of this was called The Library Group. Later that year Japan was added to the Group and was named the Group of Five. Since then, the European Union and Canada have been added to the group. 

Though seven is a small amount of all the countries in the world as you can see these countries hold a large majority of the world’s wealth and gross domestic product so an agreement between this group is huge towards a change in global taxation. An agreement between these top economies will accelerate negotiations among roughly 140 countries that are being led by the Organization of Economic Cooperation and Development (OECD).

 

How does this get approved?

The next step on the road of making this reality will be at the G20 Summit this is a larger group of finance ministers that meet. The G20 Summit will take place in Rome in October. After this, it will move to the much larger group of about 140 at the OECD. This meeting is set to take place in Paris. 

As these groups move further in negotiations there are expectations that they would like to see something a little closer to 25% to be the minimum tax amount. President Joe Biden and his administration had initially suggested a minimum tax of 21% but after tough negotiations, a compromise of 15% was reached. As negotiations move forward the issue may be contended by a lot of the smaller countries especially the ones within the European Union. 

A lot of these countries are the ones that utilize lower tax rates to attract big-name firms.  A good example of this is Ireland. Their tax rate is 12.5 % and they are already arguing that smaller nations should be allowed to have lower tax rates given that they do not have the same capacity for scale as the large economies do.  You will not need all countries to agree but you will need most countries to be willing to move at the same time. Countries that were not at the table for the G7 will probably either try to revise this proposal or have new proposals of their own. 

Unilaterally as much as Treasury Secretary Janet Yellen worked hard with the other members at G7 to come to an agreement in principle she will also face an uphill battle getting this approved especially with resistance from Republicans already mounting. President Trump had opposed digital tax initiatives in different countries and had even threatened that tariffs would be imposed against countries that tried to tax US tech companies. 

If she along with the Biden administration can not push the tax legislation through Congress, the agreements reached this weekend will be for naught. Yellen was quoted as reported by the New York Times: “That global minimum tax would end the race to the bottom in corporate taxation and ensure fairness for the middle class and working people in the US and around the world.” She also added that the tax would level the playing field for businesses and encouraging countries to compete on a positive basis, such as educating and training our workforces and investing in research and development and infrastructure.

 

Effects on Corporations

With changes in corporate taxation globally, the biggest entities that will be affected will be the large tech firms. Governments worldwide have constantly complained that these companies should be paying them more taxes because they do business within their country.  Some countries have passed taxes targeting the revenue of these companies. 

The agreement would enable countries to tax some of the profits made by big companies based on the revenue they generate in that country rather than where the firm is located. This would also take away the incentive for these large companies to shift profits to low-tax offshore havens. These changes should bring hundreds of billions of dollars into governments much in need of funds due to the covid-19 pandemic.

The biggest three of these companies, Google, Amazon, and Facebook seem very encouraged and seem to be backing these moves towards a global tax rate. Nick Clegg, Facebook’s vice president for global affairs was quoted saying that his company had “long called for reform of the global tax rules and we welcome the important progress made at the G7. We want the international tax reform process to succeed and recognize this could mean Facebook paying more taxes and in different places.”

Google spokesperson Jose Castaneda said in a statement that they strongly support the work done so far and that they strongly hope countries continue to work together to ensure a balanced and durable agreement will be finalized soon.  A spokesperson from Amazon said. “We believe an OECD-led process that creates a multilateral solution will help bring stability to the international tax system. The agreement by the G7 marks a welcome step forward in the effort to achieve this goal. We hope to see discussions continue to advance with the broader G20 and the Inclusive Framework alliance.” 

In conclusion, there is still a long road ahead. Getting enough countries to agree on this and then implementing the changes and setting regulations could take years. These companies that will be affected are immensely powerful and the powerful always want to pay less in taxes. This first step and coming to terms with the G7 is a step in the right direction but it hardly means that this will come to fruition. 

Also, as much as this will help create a level playing field for taxing these companies but it will not stop the common practice of tax avoidance by these companies. 

The legal and technical complexity of these multinational companies will make it quite different to regulate and determine where revenues of these companies were generated. At least setting a minimum 15% tax will take away the incentive to not show revenue within the country it was generated.