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Tax season is upon us, and many cryptocurrency investors are working hard to get their records in order. The IRS requires investors to report every time they traded one crypto coin for another, cashed out their coin into traditional currency, or purchased goods or services with cryptocurrency.
For investors, this can be quite a chore, noted Mario Costanz, CEO of Happy Tax and CryptoTaxPrep.com. Even for those who made just a few trades per week throughout the year, reportable transactions can really add up.
Costanz, whose company provides full service bookkeeping, accounting, CPA tax prep and advisory service that includes access to one of two primary reporting tools on the market today, noted that cryptocurrency investors are required to compile their own trades, unlike stock investors who would get a Form 1099B from their brokerage, so consulting with a tax professional is critical.
Reporting Cryptocurrency Investments To IRS
The IRS treats cryptocurrencies as capital assets subject to the capital gains tax, Costanz noted. Like other capital assets, a person’s tax rate depends on how long they hold a particular coin before selling it, as well as gains or losses from the sale.
In addition, the IRS requires investors to report costs related to the exchange and the date that it occurred. This information is typically submitted using Form 8949 and Schedule D of Form 1040. The IRS doesn’t currently impose the same third-party reporting requirements on crypto exchanges like they do on other assets like stocks, bonds and mutual funds.
Due to the nature of virtual currency, properly reporting its transactions can be more difficult than other types of capital gains, according to Costanz. Most capital assets – such as real estate, art or securities – only create tax liability upon sale. When it comes to cryptocurrency, just about any way you use it is a taxable event.
Even people who use cryptocurrency to pay for goods and services must also report those transactions as gains or losses on their cryptocurrency to the IRS.
Cryptocurrency reporting requirements are very broad, Costanz noted, but investors are required to make sure their returns are compliant.
Investors are responsible for reporting their cryptocurrency gains and losses to the IRS on their year-end tax returns.
Costanz pointed to several online tools that can help investors prepare for that first meeting with their CPA.
Cointracking.info offers an online service and mobile app that allows investors to track historical cryptocurrency prices as well as their personal profits and losses.
The online service can import data from over 40 cryptocurrency exchanges, and it can track over 4,000 virtual currencies.
Cointracking.info organizes all reportable trading information into one easy-to-use platform. It can be a huge time saver for cryptocurrency investors getting ready to file their tax returns. This is particularly true for high-volume traders and those active across several exchanges.
Most cryptocurrency exchanges allow their customers to export their trade history. Bitcoin.tax uses this data to help cryptocurrency investors figure out their capital gains or losses. Investors simply export their trade history from any compatible exchange and upload it to the Bitcoin.tax platform or use Bitcoin.tax’s API feature available for some exchanges.
From there, the online tool helps to estimate the capital gains and what needs to be reported on Form 8949.
The data imports from the many exchanges to these tools often have issues and need to be manually reconciled, Costanz noted. Also, when moving cryptocurrency from one wallet or exchange to another, the reporting often counts it as a sale, and it has to be manually reconciled in order to have the data be accurate, he added.
CryptoTaxPrep.com’s team of bookkeepers, accountants and CPAs handles those manual parts of these reconciliation processes for its clients.
A skilled cryptocurrency accountant can not only make sure you’ve properly reported your cryptocurrency investments to stay in compliance, Costanz said, but that you are also making the most out of available tax credits, deductions and tax minimization strategies.