Comprehensive Guide to Reporting Cryptocurrency on Taxes in 2018

Introduction:

Reporting cryptocurrency on taxes can be a daunting task, especially with the rise in popularity of digital currencies. In this comprehensive guide, we will delve into the intricacies of how to report cryptocurrency on taxes in 2018. Whether you are a beginner or a seasoned investor, this article will provide you with valuable insights to ensure compliance with tax regulations.

1. Understanding Cryptocurrency

Before we dive into the specifics of reporting cryptocurrency on taxes, let's first understand what cryptocurrency is. Cryptocurrency is a digital or virtual currency that uses cryptography for security. It operates independently of a central bank and is typically created through a process called mining.

2. Tax Implications of Cryptocurrency

When it comes to reporting cryptocurrency on taxes, it is crucial to understand the tax implications. Cryptocurrency is considered property by the IRS, which means it is subject to capital gains tax. This means that if you sell, trade, or use cryptocurrency for goods or services, you may be required to pay taxes on any gains.

3. Reporting Cryptocurrency on Taxes in 2018

In 2018, the IRS provided specific guidance on how to report cryptocurrency on taxes. Here are the key steps to follow:

a. Determine the Cost Basis:

The cost basis is the original value of the cryptocurrency, which is used to calculate gains or losses. To determine the cost basis, you need to consider the following factors:

- The price at which you acquired the cryptocurrency.

- The number of coins or tokens you acquired.

- Any additional costs incurred, such as transaction fees or mining expenses.

b. Calculate Gains or Losses:

Once you have determined the cost basis, you can calculate the gains or losses by subtracting the cost basis from the fair market value at the time of sale or exchange. If the result is positive, it represents a gain; if it is negative, it represents a loss.

c. Report Gains or Losses on Form 8949:

Form 8949 is used to report capital gains and losses from the sale or exchange of cryptocurrency. You will need to fill out this form for each transaction, including the date of the transaction, the amount of cryptocurrency involved, and the fair market value at the time of the transaction.

d. Transfer the Information to Schedule D:

After completing Form 8949, you will need to transfer the information to Schedule D. Schedule D is used to summarize capital gains and losses from various types of investments, including cryptocurrency. You will need to fill out Schedule D to determine your taxable income or loss from cryptocurrency transactions.

e. Pay Taxes on Gains:

If you have gains from cryptocurrency transactions, you will need to pay taxes on them. The tax rate depends on your total income and the holding period of the cryptocurrency. Short-term gains are taxed as ordinary income, while long-term gains are taxed at a lower rate.

4. Common Scenarios and Challenges

Reporting cryptocurrency on taxes can be complex, especially when dealing with multiple transactions or complex scenarios. Here are some common scenarios and challenges:

a. Mixing Personal and Business Cryptocurrency:

If you use cryptocurrency for both personal and business purposes, it is essential to keep track of the separate transactions and costs. Failing to do so may result in misreporting and potential penalties.

b. International Transactions:

If you engage in cryptocurrency transactions with foreign entities, it is important to consider any foreign tax implications. You may need to report foreign income or pay taxes on certain transactions.

c. Forks and Airdrops:

Forks and airdrops can complicate the reporting process. Forks occur when a new cryptocurrency is created from an existing one, while airdrops involve the distribution of free cryptocurrency to existing holders. Understanding how to account for these events is crucial for accurate tax reporting.

5. Resources and Support

To navigate the complexities of reporting cryptocurrency on taxes, here are some valuable resources and support options:

a. IRS Guidance:

The IRS provides comprehensive guidance on cryptocurrency taxation through various publications and FAQs. These resources can help you understand the tax implications and reporting requirements.

b. Tax Professionals:

If you are unsure about how to report cryptocurrency on taxes, it is advisable to consult with a tax professional. They can provide personalized advice and ensure compliance with tax regulations.

c. Online Communities and Forums:

Joining online communities and forums dedicated to cryptocurrency and taxation can provide valuable insights and support from experienced investors and tax professionals.

Conclusion:

Reporting cryptocurrency on taxes in 2018 can be a challenging but essential task. By understanding the tax implications, following the correct reporting procedures, and seeking support when needed, you can ensure compliance with tax regulations and avoid potential penalties. Remember to keep accurate records of your transactions and consult with professionals if you have any doubts or complex scenarios.

Questions and Answers:

Q1: Can I deduct expenses related to cryptocurrency mining on my taxes?

A1: Yes, you can deduct expenses related to cryptocurrency mining on your taxes. However, you must prove the expenses and ensure that they are directly related to the mining activity.

Q2: Are forks considered taxable events?

A2: Generally, forks are not considered taxable events. However, if you receive additional cryptocurrency as a result of a fork, you may need to report it as income.

Q3: Can I use cryptocurrency to pay for my business expenses?

A3: Yes, you can use cryptocurrency to pay for business expenses. However, you will still need to report any gains or losses resulting from the sale or exchange of cryptocurrency used for business purposes.

Q4: Are there any specific tax forms to report cryptocurrency transactions?

A4: Yes, Form 8949 is used to report capital gains and losses from the sale or exchange of cryptocurrency. You will also need to transfer the information to Schedule D to determine your taxable income or loss.

Q5: Can I file an amended tax return to correct a mistake in reporting cryptocurrency?

A5: Yes, you can file an amended tax return to correct a mistake in reporting cryptocurrency. It is important to file the amended return as soon as possible to avoid potential penalties and interest.