This year’s tax season is coming to an end, but that doesn’t mean that the issue of cryptocurrency taxes is any closer to being settled.
When tens of millions of users began purchasing digital currencies in 2017, few gave thought to the tax implications of owning an asset that would wildly appreciate and subsequently depreciate, especially when it comes to accounting for their taxes.
To be fair, guidelines from the IRS have been sparse, and there is still a lack of clarity about the exact designation of digital currencies. To some, digital currencies are just that – currency – and its appreciation is no more taxable than that of other monetary systems. On the other hand, many see digital currencies in their functional form as investment assets that can be taxed based on capital gains, or, in the case of many 2018 filers, losses.
Either way, frustration is building. In an April letter to the IRS, 21 members of the House of Representatives encouraged the IRS to issue more prescient and helpful guidelines on crypto taxes, and the MIT Technology Review commented on the issue declaring, “How the hell are cryptocurrency holders supposed to file their taxes?”.
According to a recent poll, the answer, it seems, is to avoid the issue altogether. 80% of respondents indicated that there was “not a chance” that they would declare their cryptocurrency holdings on their taxes.
Admittedly, this isn’t the most advantageous path forward, and, while the crypto tax controversy may not be solvable right now, there are steps that every crypto holder can take to prepare for next year’s filing.
Step 1: Account for Your Currency
At one point, tracking your crypto portfolio was quite simple and straightforward. With just a few tokens to manage, crypto users could easily understand their holdings and could manage their funds.
Today’s ecosystem is far more expansive. With hundreds of altcoins serving a wide variety of purposes, this process can be complicated and confusing. Even the popular crypto exchange, Coinbase, which once only supported Bitcoin a few other mainstream tokens, now accepts more than a dozen digital currencies.
As a result, managing a crypto portfolio is more challenging than ever before, which means that preparing for taxes can feel like an impossible and disparate task.
Fortunately, different software solutions are coming to market that help digital asset holders in tracking their cryptocurrency portfolio, and they can simplify an otherwise complicated ordeal.
To best prepare for next year’s tax season, adopt portfolio management software that
- combines all your crypto assets into a single space
- provides audit reports and documentation for CPAs
- offers real-time functionality for trades and other maneuvers.
It’s likely that crypto-related tax obligations will become more apparent with time. Prepare for that event by accounting for your currency.
Step 2: Reporting Your Holdings
Currently, buying and selling digital currency is considered a capital asset, which means that it is subject to taxes when it eventually sold. When a token is sold at a profit, users are required to pay a capital gains tax on the transaction.
However, if the asset is sold at a loss, as many of this year’s digital currencies were, then it can have specific tax benefits. To put it simply, users have a legal and moral obligation to report their holdings, but that doesn’t necessarily mean that it will cost investors. As you consider your investment strategy for 2019, prepare to report your holdings, and remember the benefits of the current system.
Step 3: Consider Your Payment Options
Finally, while the federal government is slow to issue updated guidelines for taxation on cryptocurrencies, several states are making it easier to pay your bill:
Last year, Ohio became the first state to accept tax payments in Crypto, and similar measures are being considered in New Hampshire. If this trend continues, crypto investors may be able to use their holdings to directly pay their tax bills, eliminating the needs to convert digital currency to fiat before settling with Uncle Sam.
Of course, this doesn’t minimize the cost, but it does significantly simplify the process. Therefore, now is a great time to advocate for similar laws across other states to make this option available to more people.
Nobody wants to pay taxes, but the right management software, a comprehensive approach to reporting, and diverse payment ecosystem can at least make the process as painless as possible. 2018’s tax season has come to a close, so now is the time to start preparing for 2019’s filing.