Tuesday, 23 July 2019

Crypto taxes due Monday - what you need to know

Cryptocurrency Tax Implications IRS Crypto Tax Returns


With April 15th looming large on the financial calendar of most Americans, the 2018 tax year will present some challenging scenarios for many. How to account for loses? Do offshore exchange wallets require ‘FBAR’ reporting? Can I trust the advice I’m receiving? We ask legal and accounting experts for their take on some important crypto tax questions.

Individual income tax returns are due on April 15th this year and US citizens who wish to stay on the right side of the law will need to record their crypto cashflow to avoid getting on the IRS’s radar in a bad way.So what do you need to know before you file this year? We asked several legal and accounting experts for their take on some important questions.

Mario Costanz

Mario Costanz is the CEO of Happy Tax - founders of CryptoTaxPrep.com

Crypto Tax Prep has recently issued a media release saying that both TurboTax and Coinbase are providing incorrect tax advice which could leave taxpayers exposed to action from the IRS - what are the details?

TurboTax ( do-it-yourself tax preparation software), is providing incorrect instructions regarding Form 8949, Sales and Other Dispositions of Capital Assets - the form used to report taxable cryptocurrency events. Instead of instructing customers to enter each and every taxable transaction as required by the IRS, the software limits the number of itemized events to 250 and recommends that product users with over 250 transactions summarize their net proceeds into short-term and long-term gains.

This is contradictory to the IRS’s very specific instructions regarding the way losses and gains for cryptocurrency are required to be reported: Unlike other stocks, bonds or other capital assets, which taxpayers receive a Form 1099-B for, every cryptocurrency transaction must be reported individually due to no 1099-B being issued.

Unfortunately, not properly itemizing this information as per the IRS’s rules can lead to penalties and audits and those with over 250 cryptocurrency transactions are advised to seek the help of a CPA with deep cryptocurrency tax and accounting experience.

In terms of Coinbase, it may be unintentionally misleading taxpayers in a way that will unnecessarily hike up their tax bills. The online tax guidance provided by Coinbase implies that airdrops are taxable as ordinary income - which is reported on Line 21 of Schedule 1 of Form 1040 - rather than as capital gains that only become taxable when the positions are sold. Anyone who has received an airdrop of cryptocurrency should work with a cryptocurrency tax and accounting specialist.

What are the potential consequences of errors in tax filings? Taxpayers should seek the assistance of tax experts with expertise in filing cryptocurrency returns to avoid IRS penalties. Failure to comply with tax laws comes with significant repercussions. For example, underpayments attributable to virtual currency transactions may be subject to penalties, such as accuracy-related penalties under section 6662. In addition, failure to promptly or correctly report virtual currency transactions when required to do so may be subject to information reporting penalties under section 6721 and 6722.

Cryptocurrency tax returns that are filed incorrectly, whether unintentionally or not, will not fly under the IRS's radar. In November of 2018, the IRS commissioner Charles Rettig proclaimed, “Crypto is no longer cash. It is information data currency that the IRS has and will have more information about than you could ever imagine.”


Jeff Vandrew Jr

Jeff Vandrew Jr is an Attorney, a Certified Public Accountant, and a CFP. He is the founder of Vandrew LLC, a New Jersey estate planning firm that assists clients with cryptocurrency estate planning issues.

Do I need to complete FinCen Form 114 and Form 8938 (a/k/a the “FBAR”)?

Unfortunately, as with many cryptocurrency tax issues, it isn’t fully clear as to when these forms are required. FBAR reports are required of all “United States persons” who have an account with a foreign financial institution. This makes a few things clear. First, any cryptocurrency held in a paper wallet, hardware wallet, or other similar method by which you personally hold your private key would not be disclosable on an FBAR, as no foreign financial institution would be involved.

Second, any cryptocurrency held on a US-based exchange would not be disclosable on an FBAR. While Coinbase and Gemini, for example, probably are “financial institutions” for FBAR purposes, because they’re based in the United States FBAR disclosure wouldn’t apply. The situation becomes murky for clients using non-US exchanges, such as Binance. Since cryptocurrency held in an exchange is held under the exchange’s keys, not your own, the exchange effectively has custody of its customers’ funds. While there are no FBAR regulations addressing cryptocurrency exchanges, their custodial function makes them seem a lot like “financial institutions”. This would make any cryptocurrency held in a non-US exchange disclosable on an FBAR.

You have nothing to lose by disclosing foreign cryptocurrency exchange accounts on an FBAR (and the related Form 8938), so it makes sense to take the safe route by disclosing. At any time, the Treasury Department could retroactively issue guidance clarifying that non-US exchanges are foreign financial institutions. The penalties for failure to disclose an account at a foreign financial institution on a timely FBAR form are some of the most severe in existence.

Can I do an IRA or Self-Directed 401(k)?

If you’ve got a big tax bill coming, contributions to an IRA or 401(k) may blunt the effect. If you’re self-employed, your 401(k) would have had to have been created by 12/31/17 to take a deduction on your 2017 taxes. However, it’s not too late to still do a SEP-IRA for the self-employed, or Traditional IRA if you’re an employee. Consider setting up either of these as a self-directed IRA or self-directed 401(k). These self-directed options would allow you to trade cryptocurrency within your retirement account on a tax-free basis.


Zac McClure

Zac McClure is the co-founder of cryptocurrency tax software creators TokenTax.

What are the options for the treatment of lost, stolen and hacked funds?

Losing access to your wallets or private keys is not as uncommon as you might expect and many exchanges in which you acquire and keep your coins are loosely managed. Recent loses at the Bitgrail, Cryptopia and QuadrigaCX exchanges, are just the latest examples of a problem that has plagued the crypto exchange sector from its earliest days.

If you lost access to your wallet or your coins were hacked when they were on an exchange, those might be casualty losses - but it is unlikely due to the U.S. changing its tax laws for 2018. One of these changes was to disallow casualty losses for individuals unless they occur in a federally declared disaster.

In other words, if your car got stolen in 2017, you could have claimed a casualty loss as an individual. Now, in 2018, you cannot. Same thing for getting your cryptocurrency stolen from your account on an exchange. In 2017 that casualty loss would have been deductible. In 2018, it is not deductible so it will not reduce your taxes at all.

One way people are addressing this is by setting up an LLC for their cryptocurrency investing, so that in the worst case scenario of being hacked they can still get a deduction by filing as a corporation.

Alternatively, they might count as capital losses which would allow you to use them to offset any gains you had and up to $3000 of income (wages, salaries, etc.). Whether this situation results in a casualty loss or a worthless security depends on the context and the cryptocurrency in question, and you should consult with a CPA, attorney, or other professional about your specific situation.

Ultimately, when it comes to creating a full picture of your 2018 crypto transactions, these will have to be recorded as well. If you just leave them out, you'll have a gap in your transactions and it will cause the cost-basis you use for other transactions to be incorrect.

What if an exchange I was using closed or went out of business?

Due to the extended bear market, many cryptocurrency exchanges had to close up shop. Most recently, this happened to the Liqui exchange. When this happens, customers usually have a limited window of time to withdraw their coins and get all the historical transaction data they need before the website shuts down for good. If you weren't able to grab the data in time then your situation will require some additional tax preparation work.

Rather than take the worst case scenario, in which you mark all of your coins sent to or acquired on those closed exchanges as $0 cost basis, you may have some options. For example, you could construct "synthetic trades" if you have some rough information. If you knew that you bought ABC coin on that exchange during November 2018, you could input the price at $410, the lowest price for coin ABC during the month of November. That way, you can fill in the missing cost basis while being confident that your calculations will have a stronger chance of withstanding any additional IRS scrutiny or a potential audit. Doing this correctly in a conservative manner is difficult so we recommend you work with a CPA that understands crypto, to help with filings.

What if my coins and tokens no longer tradable?

2017 was the year of the ICO - a phenomenon which slowed in 2018 at the same time as many existing ICO projects saw their tokens taking major losses – many dropping over 90% as the bear market continued. This caused some exchanges to de-list such tokens in bulk because they did not have enough trading volume to justify their continued listing/support. But, these coins weren't completely dead and therefore could not be called worthless securities from a capital loss perspective.

Furthermore, if you just held those tokens and never sold them, you cannot count them as capital losses. You must realize the loss by selling or disposing of the token in order to get tax relief. For many investors this caused a difficult quandary as they wanted to trade the tokens to trigger a loss, but there was nowhere for them to do so.

Sending the crypto to a burn address or selling to a friend is likely not sufficient to pass closer inspection by the IRS. You need to actually give up control of the asset and they could argue you can always tell your friend or family member to sell it back to you. If you go the route of selling to someone you know make sure to document everything via email just in case. You either need to find an exchange to trade them on or document the sale to someone that you clearly don't have control over, as much as possible.


David W. Klasing

David W. Klasing practices as an attorney and a certified public accountant in California in the areas of taxation, estate planning and business law.

What should I do if I have not been reporting my cryptocurrency activity for several years and/or my information has been provided to the department of justice income tax division under a John Doe Summons?

If you have mined, held, traded, or engaged in transactions involving cryptocurrencies it is essential to take steps to mitigate the potential consequences. This may include amending past tax returns, filing missed returns, or making voluntary disclosures. The IRS has taken steps to identify taxpayers who are utilizing Bitcoin and cryptocurrency to commit tax evasion and it is highly likely that it will become increasingly aggressive in its enforcement activities. You should contact a tax lawyer because if you are concerned about potential criminal tax charges, only the attorney-client privilege is sufficient to protect the disclosures you may make when seeking legal guidance. If you make these same disclosures to an accountant or CPA, it is very likely that the IRS will subpoena the CPA and he or she will become the government’s number one witness against you.

What are the tax consequences of a hard fork like that which occurred with Bitcoin Cash?

The landmark case Commissioner v. Glenshaw Glass may be instructive in determining if the receipt of new crypto-currency as a result of a fork results in a taxable event.

Accession to Wealth

The first prong of the Glenshaw Glass test is whether the taxpayer had an accession to wealth. This depends on the circumstances of the fork. If the new digital currency has an ascertainable value at the time of the fork, the IRS has a solid argument that the fork resulted in the taxpayer having increased wealth due to the fork. On the other hand, if a fork results in a digital coin that has no value until the market determines whether it should increase in value, the IRS will have a difficult time proving that the fork was a taxable event that yielded an accession to wealth.

Clearly Realized

The second prong requires that the taxpayer clearly realize their ascension to wealth. Realization occurs when value of property is actually received by the taxpayer. The inability to take possession or control their new wealth delays the realization event until they can, if they ever do. Cryptocurrency owners who hold their ownership keys directly have full control of their new wealth (if any) immediately after the fork occurs. Crypto-currency owners with digital wallets through Coinbase or a similar exchange do not realize their new wealth (if any) until they receive the right to control the new cryptocurrency once their exchange supports it. If an exchange never supports a newly created digital currency, a taxpayer has a strong argument that a realization event never occurred.

Complete Dominion

The final prong of the test from Glenshaw Glass requires a taxpayer to have complete dominion and control of the new money or property they have acquired. Typically, this test is easily met with regard to cryptocurrency owners who hold their keys directly as they are able to dispose of their interests in the new digital currency immediately. Those who use digital currency exchanges may not be able to exercise dominion and control of the new currency created by the hard fork if their exchange of choice does not support the new crypto-currency.

Finally, in terms of a hard fork being characterized as a capital gain or income, the Internal Revenue Code defines capital gain as gain from the sale or exchange of a capital asset. Although cryptocurrency may be a capital asset in the hands of most taxpayers, a hard fork does not appear to be a sale or an exchange as owners of a cryptocurrency receive a different type of cryptocurrency only by virtue of owning their original crypto-currency. For that reason, it appears logical that the conferring of the ownership of a different type of cryptocurrency would not be a sale or exchange and thus, would be taxed as income.

Do I have to do foreign bank account reporting “FBAR” on offshore Cryptocurrency exchanges or foreign wallets I have utilized on FinCen form 114?

In addition to being required to report capital gains, taxpayers are also required to report foreign accounts that exceed, at any time during the pertinent tax year, certain thresholds: $10,000 in aggregate for FBAR (Report of Foreign Bank and Financial Accounts) under the Bank Secrecy Act (BSA), and $50,000 in aggregate for Form 8938 (Statement of Specified Foreign Financial Assets) under the Foreign Account Tax Compliance Act (FATCA). In the past, this traditionally meant bank or other financial accounts; but it can also extend to foreign wallets and exchanges. Thus, taxpayers may be required not only to report capital gains on Form 8949, but to:

File Form 8938 (Statement of Specified Foreign Financial Assets)
File an FBAR (FinCEN Form 114, also called FinCEN Report 114, previously Form TD F 90-22.1)
Toward that end, there are at least three crucial points which taxpayers should understand about foreign Bitcoin reporting requirements:

It is not in your best interests to close the account. Do not make the mistake of panicking and closing your foreign account. This will not erase digital records of previous transactions, which the IRS can obtain by using subpoenas (as it already has against Coinbase), then utilizing sophisticated computer software to scrutinize user files. What it will do is suggest that you were trying to cover up wrongdoing, which indicates “willful” (deliberate) nondisclosure, which in turn exposes you to greater penalties – including the risk of criminal prosecution. If you have concerns about a foreign Bitcoin wallet or account, the appropriate course of action is to immediately contact a skilled tax attorney for guidance.

You may be in jeopardy from whistleblowers. Certain federal laws, such as 26 U.S. Code § 7623, authorize the government to compensate whistleblowers for “detecting underpayments of tax,” or, in some cases, “detecting and bringing to trial and punishment persons guilty of violating,” or attempting to violate, the Internal Revenue Code (IRC). Depending on the situation, you might be at risk of exposure by whistleblowers seeking to capitalize on such laws. The takeaway is that, even if you believe you are safe from IRS detection, it is “better to be safe than sorry,” which segues into the next point.

The sooner you disclose, the better – but make sure you have legal guidance. The IRS offers programs, such as the Offshore Voluntary Disclosure Program (OVDP), which allow taxpayers to receive lighter financial penalties in exchange for voluntarily reporting past noncompliance with offshore reporting requirements. Depending on your circumstances, participating in the OVDP may be beneficial to you. However, due to the immense complexity (and high legal stakes) involved in these matters, you should review your options with an international tax law attorney before contacting the IRS.

What do I do if I am unable to obtain all of the information on my cryptocurrency activity because a coin brokerage I utilized no longer exists or for some other reason beyond my control?

Utilize estimates that attempt to be fair to the taxpayer and the government and disclose that estimates were utilized and why they were necessary. This increases audit risk slightly but is grounds for penalty abatement if the IRS has a different take on how your income should have been estimated.


Ines Zemelman

Ines Zemelman has over 20 years experience in US International and Expatriate Taxation and is the founder and president of Taxes for Expats.

I purchased then sold crypto at a profit and purchased real property — do I have to report this on my tax return?

Yes — the sale of the crypto is reportable. For example, If you purchased 50 tokens for $1000 on January 1 2018 — ie your basis was $50,000. And on March 2, 2019 those tokens were worth $350,000), and you purchase a home for that amount — paid with a transfer of tokens. Effectively, the tax treatment is the same as if you simply sold the tokens for $350,000. The taxable capital gain is $300,000; (350,000-50,000). The home purchase, however, would not be reportable (if/when you decide to sell the home, it would be reportable)

If I buy one type of coin, and sell it to buy another, how is this reported?

Each transaction must be reported. If you buy one coin and sell it to buy another, this is a taxable event (just like selling bitcoin to buy your new home). Keep accurate records — they will be very useful come tax time. There are many online services that help aggregate your trades into an easy to read format which will help your tax advisor get you sorted.


source: bravenewcoin.com
Legal disclaimer: The insight, recommendations and analysis presented here are based on corporate filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. They are presented for the purposes of general information only, and all the information belongs to the original publishers. These may contain errors and we make no promises as to the accuracy or usefulness of the information we present. You should not make any investment decision based solely on what you read here.

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