Bitcoin, litecoin, ethereum and other block-chain currency have been on a run with bitcoin crossing the $10,000 threshold from a start of $997 at the beginning of the year. How do you report these transactions on your tax return? Will you receive a 1099?
The IRS considers these currencies to be property with short-term gains taxed at ordinary income rates. Very few taxpayers have been properly reporting their transactions. This has drawn IRS attention and recently a judge ruled that Coinbase would have to turn over details about more than 14,000 customers who had transactions over $20,000 between 2013 and 2015.
How do you report transactions?
If you use an exchange like Coinbase, you are probably not going to get a 1099. You can, however access a summary report of digital currency purchases and sales over the year. This will list the basis and capital gain or loss.
While this report can be helpful for tax purposes if may not accurately reflect certain transfers, so you should also keep your own records.
Where is your digital currency held?
If you are using a non-US based exchange, you may need to report this account.
Depending on the value of the account, you will need to file FinCen form 114 ($10,000 or more in value at any point in the year) with the Treasury and/or form 8938 with the IRS (varies based on tax filing status, but kicks in at $50,000). Failure to file is a crime, in and of itself, that carries stiff civil penalties.
Can you make charitable contributions?
Many charitable organizations are starting to accept crypto assets donations. How would a contribution affect your taxes? Assume you purchased $100 of litecoin that is now worth $5,000. If you gave it to a charity, you would not have to pay tax on the capital gains and you can deduct $5,000 on your taxes.
What about 1031-exchange treatment?
There has been some talk that because of the property classification, bitcoin transactions might qualify as 1031 exchanges. This would effectively postpone when you would have to pay capital gains taxes. The Republican tax bill quashes this by explicitly limiting 1031 exchanges to real estate.
Have you properly reported transactions on your tax returns? Remember the IRS has up to three years to conduct an audit. Mistakes made on a 2017 return might not come up until 2020 after the IRS is much farther into its investigation. Coming forward to correct mistakes and pay taxes can limit potential civil and even criminal liability.