Cryptocurrency Tax Planning Basics

While some investors see quick gains selling cryptocurrency, they must comply with the tedious task of tracking their profits. For tax purposes, the IRS treats virtual currency as property. The IRS considers cryptocurrencies to be capital assets that are subject to the capital gains rule. Notice 2014-21 explains that principles applicable to property transactions also apply to virtual currency transactions.

Investors who fail to report virtual currency transactions may face audits, penalties, and interest. In extreme cases, a taxpayer accused of evading taxes or filing a false tax return could face criminal prosecution.

Crypto Tax Planning 101

An article from CoinCentral, Cryptocurrency Taxes 101: What to Know Come Tax Season, by Mario Costanz, points out the importance of recording each transaction. Constanz explains that a crypto-investor must record the cost basis, which is the amount paid for the virtual currency. Later, when the investor sells the virtual currency or makes a purchase, the investor must record the selling price. At tax time, the IRS expects crypto-investors to report the profit or loss on their tax returns

Investors that make multiple exchanges have to account for each transaction. To help investors, websites such as CoinTracking.info and CoinTracker.io offer tax management software that securely auto-syncs to each transaction.

Track Everything and Keep Records

To be ready for taxes, investors need to maintain accurate records of every cryptocurrency transaction. Examples of transactions that should be recorded are listed below.

1. Purchasing cryptocurrency – record the date purchased and amount paid for:

  • Buying coins (amount paid)
  • Mining coins (value when received)
  • Cryptocurrency gifts (fair market value)

2. Selling cryptocurrency – record the date sold and amount received for:

  • Selling coins (amount received)
  • Everyday purchases (cost of item)

Tracking cryptocurrency transactions will provide accounting for the difference between the original amount paid and the amount received when sold. The difference will result in either a profit or a loss. While an investor must report the profits, the investor can also deduct losses up to $3,000 against other income.

Online tools help investors with record keeping. To learn more about organizing tax records, visit: 3 Easy Tax Planning Tools for Cryptocurrency Investors.

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Alice is a member of the Florida Bar, and she focuses on business and technology matters in her law practice. She attended the Warrington College of Business at the University of Florida and earned a Bachelor of Science in Business Administration. After graduating, she earned a Juris Doctor at the Stetson University College of Law. During law school, she served as an Assistant Executive Editor for Stetson Law Review and also as a Staff Editor for Stetson Journal of Advocacy and the Law. She currently serves on The Florida Bar Journal/News Editorial Board.