Tax season is upon us. It begins from January 29 with the last date of filing set as April 17, 2018. To help cryptocurrency users comprehend where they stand with their dear digital tokens regarding taxes, the Internet Revenue Service of the United States (IRS), recently issued a notice clarifying that as of now, Bitcoin and other cryptocurrencies are “treated as property”. “General tax principles applicable to property transactions apply to transactions using virtual currency,” The notice states further.
This means that anyone filing cryptocurrencies with a digital wallet having some cryptocurrency will now need to find relevant fields to ensure that they are recording their taxes correctly. Below are some tips that suggest how you can do your taxes the right way.
ON PRESENTS AND CHARITABLE DONATIONS
If you hold some cryptocurrency and if that’s common knowledge within your circle, then there’s a very high chance that you went through a slew of questions over holiday dinners. There’s also the possibility that someone in your family expected you to get into the holiday spirit and gift them some of your crypto, but was that a smart thing to do for taxes, or even gains for that matter?
To explain this, if you did gift cryptocurrency – or if you were generous enough to give the gift of Bitcoin – to someone in your family, then you might have just used your annual exclusion of $15,000 regarding gifts. It will certainly not get you any tax deduction, either.
That being said, if you went over the limit of $15,000, then you will need to file a gift tax return. But that’s where an additional exclusion comes in.
With the gift tax return of the amount over $15,000, you most likely would not have to pay any gift tax. Why you ask? Well, you will simply be using an amount from your lifetime exclusion of gift and estate tax. As of this year, the amount that a US citizen can transfer without any taxes during their lifetime was adjusted to be higher ($11.2 million).
Those conditions were for presents given to individuals. If you decide to donate your cryptocurrency to a 501(c)(3) charitable organization, you will get a charitable contribution deduction.
It would be calculated on the value of cryptocurrency at the time of donation. Let’s say that you bought a Bitcoin at $1000, but at the time of donation, it was worth $16,000. That would mean that you will get the deduction for $16,000.
Furthermore, you would not need to pay the capital tax gain on the inflated amount. Therefore, choose your gift-receivers and charitable organizations wisely.
LOANS AND HEDGE FUNDS
Loaning money is not subject to tax for the borrower or the lender, except for interest payments. While you can loan your cryptocurrency to people, it’s not clear whether that action will be met with the same treatment by the IRS as a loan of conventional currency does.
Since the IRS states that cryptocurrency is identified as “property,” you do not want the loan and the repayment – which most probably is in a different cryptocurrency – of different cryptocurrency to be met with the treatment for taxable assets.
However, a large part of that relies on the documents that you have and how much of a real loan constitutes that transaction.
That brings us to hedge funds, which are popular because they help keep your cryptocurrency stable. That being said, you need to ensure that you are not walking into having it termed as a “sale for tax purposes” without your knowledge.
If you were lucky enough to benefit from the substantial gains that the cryptocurrency markets offered last year, you might need to start thinking about how those gains would reflect in your tax returns for the next year.
Here, you might consider selling some of your cryptocurrency or even putting it into a hedge fund. That being said, it’s a calculated decision to make, and you should give it ample thought before acting upon it.
For instance, your tax year could have a significant capital loss in it already. Or, if you have gone through an event in the past that makes you carryover losses from previous years, then you can use that too.
Therefore, it is suggested that you take your gains into account and see if you have any losses to cover for them, but if you do not, then you might need to start considering selling some of the cryptocurrency.
RECORDS AND FORMS
If you have done your taxes in the past, then you must know how important it is for you to keep records for which you are filing the taxes.
Cryptocurrency is no exception. You need to ensure that you have proper records of it. Create a backup copy if there’s a need to do so.
And this brings us to Form 1099 which provides a record of income paid to you previously. You should remember that any income to employees in virtual currency is taxable. It also needs to be filed through a Form W-2 and would be subject to federal income tax withholding along with payroll taxes.
At the end of the day, you should remember that the IRS values those who do their taxes, even if they are done incorrectly after the individual’s best efforts. Just try and provide as accurate information as possible and don’t miss out on your taxes. Remember, the deadline is April 17.