Comprehensive Guide on How to Report Cryptocurrency for Taxes in 2018

Introduction:

Cryptocurrency has gained immense popularity in recent years, and with the rise of digital currencies, many individuals have invested in them. However, reporting cryptocurrency for taxes can be a complex task. In this article, we will provide a comprehensive guide on how to report cryptocurrency for taxes in 2018, covering various aspects such as capital gains, reporting forms, and common mistakes to avoid.

I. Understanding Cryptocurrency and Taxes

1. What is cryptocurrency?

Cryptocurrency is a digital or virtual currency that uses cryptography for security. It operates independently of a central authority and is typically based on a decentralized system.

2. Why report cryptocurrency for taxes?

Reporting cryptocurrency for taxes is mandatory in many countries, including the United States. It is essential to comply with tax regulations to avoid penalties and legal issues.

II. Determining Capital Gains

1. What is capital gain?

Capital gain refers to the profit you make from selling an asset, such as cryptocurrency, for more than its purchase price.

2. How to calculate capital gain?

To calculate the capital gain, subtract the cost basis (purchase price) from the selling price. The cost basis can be determined by the fair market value of the cryptocurrency at the time of acquisition.

III. Reporting Cryptocurrency for Taxes

1. Reporting forms

In the United States, you need to report cryptocurrency transactions on Form 8949 and Schedule D of your tax return. These forms are used to calculate capital gains or losses.

2. Reporting cryptocurrency exchanges

If you have used a cryptocurrency exchange, you may receive a 1099-K form from the exchange. This form provides information about your cryptocurrency transactions, including the total value of transactions and the number of transactions.

3. Reporting cryptocurrency received as payment

If you have received cryptocurrency as payment for goods or services, it is considered taxable income. You should report it on Schedule C (Form 1040) or Schedule C-EZ (Form 1040).

IV. Common Mistakes to Avoid

1. Failing to report cryptocurrency transactions

Not reporting cryptocurrency transactions can lead to penalties and legal issues. It is crucial to keep accurate records of all cryptocurrency transactions.

2. Misclassifying cryptocurrency as a personal expense

Cryptocurrency should be reported as an investment or business expense, not as a personal expense. Misclassifying expenses can result in incorrect tax calculations.

3. Not understanding tax rates

Different countries have different tax rates for cryptocurrency. It is essential to research and understand the tax rates applicable to your specific situation.

V. Additional Tips

1. Keep detailed records

Maintain detailed records of all cryptocurrency transactions, including the date, amount, and purpose of the transaction.

2. Consult a tax professional

If you are unsure about how to report cryptocurrency for taxes, it is advisable to consult a tax professional or certified public accountant (CPA).

3. Stay updated with tax regulations

Tax regulations regarding cryptocurrency can change frequently. Stay informed about the latest tax laws and guidelines to ensure compliance.

5 Questions and Answers:

1. Q: Do I need to report cryptocurrency transactions below a certain value?

A: Yes, you are required to report all cryptocurrency transactions, regardless of the value. However, transactions below a certain threshold may not be subject to capital gains tax.

2. Q: Can I deduct cryptocurrency losses on my taxes?

A: Yes, you can deduct cryptocurrency losses on your taxes. However, you must follow the same reporting procedures as capital gains, and the losses can only be deducted against capital gains.

3. Q: What if I received cryptocurrency as a gift?

A: If you received cryptocurrency as a gift, you are not required to report it as taxable income. However, you should keep records of the gift for future reference.

4. Q: Can I report cryptocurrency transactions on a separate tax return?

A: No, you must report cryptocurrency transactions on your regular tax return using Form 8949 and Schedule D. There is no separate tax return specifically for cryptocurrency.

5. Q: What if I made a mistake on my cryptocurrency tax return?

A: If you made a mistake on your cryptocurrency tax return, you should file an amended return as soon as possible. Contact a tax professional for guidance on how to correct the mistake and avoid penalties.