A Guide to Proper Tax Payment of Cryptocurrency in 2018

Despite the increasing exposure of cryptocurrencies, the laws surrounding them remain in a gray area for most governments, especially when it comes to reporting digital currency income. The United States’ tax department, the Internal Revenue Service, has issued a rule 2014-21 that states that Bitcoin and other altcoins are subject to state income and personal income tax. So how do you manage your cryptocurrencies and report taxes correctly?

Record

Let’s start with the boring topic of record keeping. Yes, this applies to cryptocurrency investors, too. If you’re thinking about taxes, it’s a good idea to keep some records. If you’ve ever tried to tell the IRS “I lost my receipt,” you don’t want to do it again.

The IRS knows every one of your excuses. It's not that they don't have any empathy, you just find it easiest to not have to prove something in other ways or with other extra energy. Periodically, the IRS issues reminders to taxpayers about how to preserve and take care of your tax records.

Especially in situations like natural disasters, which can make traditional record management cumbersome, the IRS recommends that people keep a backup of their tax records somewhere safe, which is good advice for cryptocurrency investors as well.

Sell ​​some assets?

If you do get a huge return on your investment, you may want to consider how you will pay taxes throughout the year. It's not that you shouldn't think about it too early. In fact, it's better to start preparing for it before the end of the year so that you can make some adjustments in time. You may sell some cryptocurrencies even though you think the bull market will continue to move forward.

There are more things involved in the above determination than just fees. But it's at least wise to consider it. For example, what if your tax year already has a sizable capital loss included in it, or you have a large carryover loss from earlier years? In total, the unused capital loss will absorb $3,000 of the money in ordinary income.

But unless you have some capital gains to offset your $3,000 capital loss, then this becomes a fee income for you. Some people carry over unused capital losses year after year. So if you have some capital gains that you haven't noticed yet and you need to consider selling some assets that have gained to absorb your losses, you can try this method and see how it works.

Leasing through interest rates and hedging

Borrowing money is not taxable for both the borrower and the borrower unless the loan is used to pay interest. So, can you lend your cryptocurrency to someone else? You can, but the question is whether the IRS will consider the loan the same as borrowing money.

The jury is still out on this, the IRS considers cryptocurrency to be property for tax purposes. You don’t want a loan and a payment (of different cryptocurrencies?) to be treated as one tax item. Part of this will come down to your documentation and how well it looks like a real loan.

Cryptocurrency hedging is another hot topic to consider. Hedging can help investors avoid large price swings in the volatile cryptocurrency market. But be careful that you are trying to avoid an arrangement that you do not wish to enter into, i.e. one that implies a sale or purchase for tax purposes.

Gift

The holidays may be over soon, but chances are every one of your family members would still like to send some Bitcoin and other cryptocurrencies. Their prices are all over the news these days, and there’s been a lot of news about cryptocurrency gifts and donations, but is this really a smart tax strategy?

A charitable act should be the best way to transfer cryptocurrency. If you give the cryptocurrency to a high-quality charity, you should be able to reduce your income tax by the entire market value of the cryptocurrency market. If you buy $500 of cryptocurrency and donate it to charity when it is worth $15,000, you will get a tax deduction for your $15,000 contribution. In addition, you will not have to pay taxes on the $14,500 gain.

Sending cryptocurrency to a private group is not so simple. The same gift you give to your nephew will not have a corresponding tax reduction. You will also need to fill out a tax return if the gift exceeds $15,000. In 2018, $15,000 is called the "annual exclusion", which means that you can give gifts of this value to any number of people every year without reporting it.

Any gift over $15,000 will require a tax return, even though you may not have to pay any gift taxes. It usually takes some time to deal with gift taxes and estate taxes. For 2018, the numbers are climbing fast. The amount you can transfer tax-free during your lifetime from birth to death is $11.2 million per person, or $2.4 million for a married couple.

1099 Form

Finally, don’t forget about the upcoming flood of IRS 1099 forms. Normally, these boring tax forms are issued at the end of January and report your income from the previous year. The IRS says that virtual currency wages paid to employees are also taxable and need to be reported on Form W-2, which is part of federal income tax withholding and personal income tax.

Likewise, virtual currency payments to independent contractors are taxable, and the payer of a business-related payment must file Form 1099. Payments made with virtual currency are subject to the same form as other property payments. This means that if a person pays an independent contractor more than $600 in virtual currency for services provided by the contractor for business purposes, he or she must file Form 1099.
If you need to file a 1099, you need to keep up with it, just like everyone else. Everyone needs to report to the IRS and state tax authorities. If you don't file your income tax returns with the appropriate agencies, the IRS will take action.

This may seem confusing, but don't worry. The IRS is usually pretty lenient with people who need to fill out tax forms, and it's okay to make mistakes, as long as you don't avoid filing.