Though cryptocurrencies like bitcoin have been around for several years, it is only recently that large numbers of people have begun to jump into this type of investing. With promises of big returns, investors are diving in quickly, without putting much thought into how this type of investment impacts your taxes.
If you’ve invested in cryptocurrency, and you’re now trying to calculate its impact on your tax return, we strongly recommend that you contact a professional tax preparer in Provo to ensure the issue is handled properly. Cryptocurrency taxes can be a bit complicated, and failing to report your profits and losses correctly can lead to difficulties with the IRS. However, here are 3 things that you need to know upfront so that you can be better prepared to claim this investment on your return.
It’s Not Treated Like Cash
Cryptocurrency is a bit ambiguous in its very nature. Its value fluctuates frequently, much like stocks and bonds. But you can also use it to make physical purchases, like cash. Because of this, some people try to claim their cryptocurrency as if it were cash. However, this is an asset that, for tax purposes, is handled more like stocks, bonds, and even real estate. You’re taxed on your gains and losses at the time of sale, rather than the amount you currently have in your possession.
You’re Responsible for Reporting
While cryptocurrency is taxed like stocks and bonds, you won’t get quite as much assistance with claiming this investment on your tax return. While your brokerage firm or bank would send you a 1099 tax form showing profits and losses from any sales of stocks and bonds, you most likely won’t receive such a form for your crypto-exchanges and transactions. Instead, you bear the brunt of the responsibility for tracking and reporting your investment.
This means that you need to be collecting the following four pieces of information for every transaction you make with your investment:
- When the cryptocurrency was purchased
- The purchasing price
- When you sold it
- The sale price
You’ll need this information to show how much of a profit or loss you had with your cryptocurrency. If you sold at a profit, you’ll need to pay taxes on the gains you received. If you sold at a loss, you can reduce your tax bill, up to certain limitations set by the IRS.
If you’ve purchased your cryptocurrency in separate batches (as many people do), determining your profit or loss can be a bit confusing. But, generally speaking, you’ll want to stick to a “first in, first out” rule; compare your earliest sale price to your earliest purchase price to determine how much of a profit or loss you had, and so on. One of our professional tax preparers at Biesinger & Kofford CPAs can assist you with this.
You Should Keep a Record
Assuming you dove into the cryptocurrency investment trend without considering the tax implications, you’ll likely find yourself sorting through a lot of old information, trying to track down purchase and sale dates, prices, and transaction histories. But moving forward, it is best that you keep a detailed record of all of your crypto-transactions to avoid having to dig through records when you file your next tax return. Be sure to include the four pieces of information mentioned in the previous section, as well as any other pertinent details regarding the transaction.
Remember, the responsibility to report your profits and losses for cryptocurrency is on you, so you want to simplify the process as much as possible by keeping accurate records. This will make it much easier to complete your tax forms when the time comes. Still, it is best to enlist the expertise of a professional tax preparer in Provo to ensure that nothing is overlooked, and avoid any issues that can arise from improperly reporting your cryptocurrency on your taxes.