If you spend or invest in cryptocurrencies, it’s imperative for you to understand how these virtual currency transactions affect your taxes.
The Trump tax reform bill changes some essential aspects of how you report your cryptocurrency transactions. It’s important to note these changes so you file your taxes properly next year.
Here’s a list of how and when to report your cryptocurrency investments on your taxes.
Capital gains and losses
In many ways the IRS regards cryptocurrencies exactly as it regards stocks. While cryptocurrencies and stocks are considered assets, it’s not until a taxable event occurs that you need to report them on your taxes.
On the subject of cryptocurrencies, a taxable event is defined as using cryptocurrency to purchase goods or services, trading one cryptocurrency for another type of cryptocurrency, and converting your cryptocurrency into cash.
For those buying and selling cryptocurrency, exchange transactions are calculated as capital gains and losses just as when you buy or sell stocks.
Is it important to know that the new tax bill allows some capital gains to be reported as tax-deferred like-kind exchanges. However, accountants and lawyers seem to agree that this category would not apply to cryptocurrencies.
As with stocks, if you lose money on your cryptocurrency investment, you can claim your capital loss up to $3,000 and offset your loss with your taxable income. If your loss exceeds $3,000, you can carry that loss and file it for the following tax year.
Long-term vs. short-term gains
Your cryptocurrency investments may be subject to different tax rates based on whether they are considered long-term or short-term gains. This is determined by the duration of your holding period.
A holding period is defined as the amount of time between the acquisition of the asset and the taxable event.
If this time period is less than a year, it’s considered a short-term gain and if it exceeds a year is considered long-term.
The long-term capital gains rate falls anywhere between 0 to 20% based on your taxable income. Short-term gains are taxed ordinary income at your marginal rate, as if it were ordinary income from a job.
Other tax bill effects
As with personal investments, short-term corporate gains are treated as ordinary income, however, under the new tax plan the marginal rate has changed considerably and now ranges from 10% to 37%.
This significant decrease presents an opportunity for corporations that are filing for short-term gains on virtual currency next year.
It also used to be that any fees associated with investing in cryptocurrency could be considered a tax deduction.
However, this is no longer a possibility under the new tax plan. But, this only affects personal investments, so corporate cryptocurrency investments are still eligible for deductions.
Making sure that you report your cryptocurrency investments on your taxes is a high priority for the IRS, which is why it is important for you to track, record and report all of your virtual currency transactions.
It’s also important to note that how the IRS regards cryptocurrency is evolving, so you’ll need to stay on top of potential changes going forward.