Crypto Tax – A Guide for Newbies

Bitcoin is the 'original' cryptocurrency and sits at the helm of the cryptocurrency revolution. It is also the first application of BlockChain technology. Blockchain technology is considered disruptive, and it is known to have disrupted traditional ledger technologies.

Bitcoin has managed to make a name for itself in the currency and fintech spheres by successfully managing a decentralized, but secure currency nonetheless. 

Centralized institutions like banks do not govern Bitcoin or any other cryptocurrency. Cryptocurrencies run on a cryptographic encryption system that acts as the authority to carry out transactions. 

Bitcoin miners solve pieces of an open-source algorithm, which organizes and verifies transactions. In return, this authority rewards Bitcoin miners in accordance to the effort they put in.

Bitcoins can be exchanged for FIAT currency like USD or can be used directly to purchase goods or services. However, it should be noted that Bitcoins are treated like assets, not money. This means that Bitcoins are liable to capital gains tax the same way property is liable to tax. All cryptocurrencies are subject to crypto tax. 

While Bitcoin transactions were initially claimed to be anonymous, the vast majority of Bitcoin transactions today are open and straightforward. 

In the past, the Government had observed rampant black-market trading in Bitcoin. 

Nowadays, cryptocurrency exchanges impose anti-money laundering conditions and pre-requisites on cryptocurrency traders to ensure they do not get in trouble for not paying crypto tax. The biggest hassle for crypto traders has always been crypto tax. 

Crypto Tax Conditions

In the US, virtual currencies are treated as property. In other words, anything that is purchased using a cryptocurrency is liable to be taxed as a capital gain. That capital gain tax could be short or long term depending on how long the cryptocurrency was held. 

Traders are expected to disclose everything to the IRS to avoid tax evasion charges. It is essential for crypto traders to know what constitutes a taxable event and what does not. These are the scenarios that would require a crypto trader to pay crypto tax: 

  • Exchange of cryptocurrency for fiat currency. An example of a FIAT currency is USD. 

  • Using cryptocurrency in exchange for goods and services. 

  • Exchange of one cryptocurrency for another cryptocurrency.

  • Reception of mined and forked cryptocurrencies. 

According to the IRS, a transaction does not qualify for a taxable event: 

  • If you buy a cryptocurrency with Fiat money

  • If you donate a cryptocurrency to a tax-exempt non-profit organization.

  • If you gift a cryptocurrency to a third party

  • If you transfer cryptocurrencies amongst your wallets

Exchanging Cryptocurrencies

Exchanging cryptocurrencies subject investors to crypto tax as well. 

If you buy another cryptocurrency with your Bitcoin, you are officially selling your Bitcoin. That means you have to report the difference in the value of Bitcoin from when you purchased it to when you used it for the other cryptocurrency. 

In addition to this, you ought to make a note of the value of the cryptocurrency you are buying at the time of purchase so that you know when to sell it. 

Several exchanges are known to help crypto traders organize all this information by offering to export their trading data for free. This is bound to help their accountant determine their tax burden. 

Recording this data and highlighting important points of tax interest can also be carried out by Blockchain solutions.  

If you are filing cryptocurrency taxes for the first time, it is highly recommended that you go to a certified accountant. 

Filing your crypto tax is undoubtedly a daunting task. It gets more complicated with every transaction you carry out. However, it can be done if you are willing to consult CPAs and other tax professionals.

Crypto Tax Calculators 

All crypto traders would agree that crypto tax calculators make for an invaluable tool that simplifies the process of filing crypto taxes. Just like the cryptocurrencies, the quality and the number of crypto tax calculators are going up. These are widely available and boast several useful features. 

Koinly.io

Koinly has made a name for itself as one of the best crypto tax calculators in recent times. It's easy to use user interface makes it an appealing option for crypto traders. 

It is loaded with several notable features, one of which is a portfolio tracker. 

The transaction reports support the most used accounting methods, such as the ACB (Average Cost Basis) and FIFO (First in First out) method.

CoinTracking

Cointracking seems to be one of the best solutions for your crypto tax requirements. It analyzes your transaction data and generates real-time results and reports on various details like profit and loss, the value of your Bitcoins, and realized and unrealized gains. Also, It is compatible with multiple third-party crypto tax tools like TurboTax

Bitcoin.Tax

Bitcoin.Tax is one of the oldest yet well-known crypto tax calculators on the market. It is considered a trust-worthy crypto tax tool by numerous crypto traders. If you are looking for a traditional crypto tax calculator, look no further. 

Zenledger 

Zenledger is a crypto tax calculator worth noting. It allows users to import cryptocurrency transaction-related data and history, thereby making capital gains tax calculation very simple. 

Crypto tax-related entities such as capital gains, income, and profit and loss statements are generated after the transaction history is imported. 

BearTax 

BearTax is similar to Coinbase because of its simple user interface and design language. 

Diversity of features is undoubtedly their selling point, but It should be mentioned that BearTax could do much better with a few more features.