Comprehensive Guide on Reporting Cryptocurrency on Your 2018 Tax Return

Introduction:

Reporting cryptocurrency on your 2018 tax return can be a daunting task, especially if you are new to the world of digital currencies. However, understanding the tax implications and following the correct procedures can help you avoid penalties and ensure compliance with tax regulations. In this guide, we will explore the ins and outs of reporting cryptocurrency on your 2018 tax return, providing you with valuable insights and tips to navigate this complex process.

1. Understanding Cryptocurrency Taxes:

Before diving into the specifics of reporting cryptocurrency on your 2018 tax return, it is crucial to have a clear understanding of the tax implications associated with digital currencies. Cryptocurrency is considered property by the IRS, which means it is subject to capital gains tax. This means that any gains or losses from the sale, exchange, or disposal of cryptocurrency must be reported on your tax return.

2. Types of Cryptocurrency Transactions:

There are several types of cryptocurrency transactions that you may need to report on your 2018 tax return. These include:

a. Purchases: If you acquired cryptocurrency in 2018, you must report the cost basis of each purchase. This is the amount you paid for the cryptocurrency, including any fees associated with the transaction.

b. Sales: If you sold or exchanged cryptocurrency in 2018, you must report the proceeds from the sale. The difference between the cost basis and the proceeds will determine if you have a gain or loss.

c. Mining: If you earned cryptocurrency through mining activities in 2018, you must report the fair market value of the cryptocurrency as income.

d. Airdrops: If you received free cryptocurrency through an airdrop in 2018, you must report the fair market value of the cryptocurrency as income.

3. Reporting Cryptocurrency on Your Tax Return:

To report cryptocurrency on your 2018 tax return, you will need to complete the following steps:

a. Calculate Your Cost Basis: Determine the cost basis for each cryptocurrency transaction by keeping detailed records of your purchases, including the date, amount, and price.

b. Determine Your Proceeds: Calculate the proceeds from each sale or exchange by multiplying the number of cryptocurrency units sold by the price at the time of the transaction.

c. Calculate Your Gain or Loss: Subtract the cost basis from the proceeds to determine if you have a gain or loss. If you have a gain, it will be subject to capital gains tax.

d. Complete Form 8949: Use Form 8949 to report your cryptocurrency transactions. This form is used to summarize your gains, losses, and cost basis for each transaction.

e. Transfer the Information to Schedule D: Transfer the information from Form 8949 to Schedule D of your tax return. Schedule D is used to calculate your capital gains and losses.

4. Additional Considerations:

When reporting cryptocurrency on your 2018 tax return, there are a few additional considerations to keep in mind:

a. Foreign Cryptocurrency: If you held cryptocurrency in a foreign country during 2018, you may need to report it on Form 8938 if the value exceeds certain thresholds.

b. Reporting Exchanges: If you used a cryptocurrency exchange to buy, sell, or trade cryptocurrency, you may receive a 1099-K form from the exchange. This form will provide information about your transactions and should be used to complete Form 8949.

c. Late Filings: If you missed the deadline for filing your 2018 tax return, you may still be required to report your cryptocurrency transactions. However, you may face penalties and interest for late filings.

5. Common Questions and Answers:

Question 1: Can I deduct losses from cryptocurrency on my tax return?

Answer: Yes, you can deduct losses from cryptocurrency on your tax return. However, you can only deduct the amount of losses that exceed your capital gains for the year.

Question 2: Do I need to report cryptocurrency transactions if I didn't make any gains?

Answer: Yes, even if you did not make any gains, you are still required to report all cryptocurrency transactions on your tax return.

Question 3: Can I report cryptocurrency transactions on a Schedule C instead of Schedule D?

Answer: No, cryptocurrency transactions must be reported on Schedule D. Schedule C is used for reporting business income and expenses.

Question 4: Are there any penalties for not reporting cryptocurrency transactions?

Answer: Yes, there are penalties for failing to report cryptocurrency transactions. The IRS can impose penalties of up to $10,000 and interest on late payments.

Question 5: Can I defer capital gains tax on cryptocurrency by holding it for a longer period?

Answer: Yes, you can defer capital gains tax on cryptocurrency by holding it for a longer period. If you hold the cryptocurrency for more than a year, the gains will be taxed at the lower long-term capital gains rate.

Conclusion:

Reporting cryptocurrency on your 2018 tax return may seem complex, but by understanding the tax implications and following the correct procedures, you can ensure compliance with tax regulations. Keep detailed records of your cryptocurrency transactions, calculate your gains and losses, and report them accurately on your tax return. By doing so, you can avoid penalties and maintain your financial well-being.