What You Should Know about Paying Taxes on Cryptocurrency

15 Jun What You Should Know about Paying Taxes on Cryptocurrency

Bitcoin and other cryptocurrencies have been around for several years, but they really gained a lot of steam in 2017, with more and more people buying in—and cashing out—than in previous years. But most of the people jumping onto the cryptocurrency train aren’t entirely sure how to pay taxes on cryptocurrency profits and losses. It’s a bit of a gray area, and can get pretty complicated.

If you’re trying to figure out how your cryptocurrency investment impacts your taxes, here are a few things you should know. But bear in mind that, with an issue this complex, it is usually best to work with a tax expert in Provo in order to ensure you’re handling it properly.

Don’t Treat It Like Cash

Cryptocurrency creates a bit of a blurred line between cash assets and investments. While it is possible in many places to use cryptocurrencies like cash, it is not taxed that way. For IRS purposes, cryptocurrency is treated more like stocks and bonds, or even real estate investments. You’re taxed based on your gains or losses, which means you’ll need to track your cryptocurrency’s value.

Reporting Your Cryptocurrency for Tax Purposes

While you would normally get a 1099 tax form from your brokerage firm or bank on sales of stocks and bonds, you don’t always receive this form for crypto-exchanges and transactions. This means that you are the one responsible for tracking and reporting your cryptocurrency investment.

So, if you have sold any cryptocurrencies, you’ll need to either pay the taxes on the gains you received, or you can reduce your tax bill based on the amount you lost on the investment, with certain limitations. You’ll need the four following pieces of information to report your cryptocurrency on your taxes:

1. When it was purchased
2. How much you paid for it
3. When you sold it
4. How much you received for it

If you bought cryptocurrencies at different times, this can get a bit confusing. But, generally speaking, you want to follow a “first in, first out” rule. So, you would want to compare the earliest purchase price with the earliest sale price when determining how much of a profit or loss you had. A professional tax preparer at The Accounting Guys can also help you with calculating how much you owe, and assist you with filling out the proper tax forms.

Tracking for Future Reporting

Obviously, if you haven’t been keeping track of your cryptocurrency transactions throughout the year, it can be a bit of a hassle to round up all of this information and ensure it is accurate. This is why we strongly recommend that you keep a detailed record of all of your crypto-exchanges and transactions, including the four pieces of information mentioned above for every exchange you make.

Remember that reporting is entirely on you for this kind of investment, so you want to make it as easy on yourself as possible and ensure your records are as detailed and accurate as possible. This will make completing your Form 1040 much easier when tax time rolls around. Be sure to enlist the help of a tax expert in Provo to avoid any errors in handling the taxes for cryptocurrency investments.