How Crypto is taxed in the US: a taxpayer's dilemma

Last year there was a bear market for cryptocurrencies. Many investors who did not know how to hedge their cryptocurrency investments saw these investments lose value from the 2017 market levels.

Compared to the deadline to report their taxes before April 15, 2019, individual US taxpayers may wonder what their US tax return obligations are if they lose, donate, or sell / exchange their cryptocurrencies in 2018.

The dilemma of a taxpayer

Let us imagine a potential taxpayer in front of his tax adviser and embarrassed to tell him that he had lost 90 percent of an investment in cryptocurrencies when the cryptocurrency markets underwent a recession in 2018, with leading cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) 80% or more down.

The taxpayer invested heavily in crypto at the end of 2017 and early 2018 – which he said he had regretted every day since he lost almost everything.

The tax adviser assured the taxpayer that this would only lead to a taxable event if he sold, exchanged or donated his cryptocurrency in 2018, and that these things should be reported in his US tax return, but that cryptocurrency would not give rise to a taxable event, but may give rise to tax reporting requirements if the cryptocurrencies are held in a foreign financial account.

Cryptocurrency hodlers

If in 2018 a taxpayer has not sold or exchanged the cryptocurrency that he purchased at the end of 2017 or early 2018 and still holds, there is no taxable event to report on his US tax return.

Tax reporting requirements would arise if the taxpayer would keep these cryptocurrencies in a foreign financial account and if the mandatory financial thresholds Foreign bank account report (FBAR) and Foreign Account Tax Compliance Act (FATCA) reporting requirements, according to a letter from the American Institute of Certified Public Accountants (AICPA) to the Internal Revenue Service (IRS).

FBAR: A taxpayer with a financial interest in or signing authority on a foreign financial account must submit an FBAR (Foreign Bank Account Report) FinCEN Form 114 if the total value of the foreign financial account exceeds $ 10,000 at any time during the calendar year . FBAR non-compliance would expose a taxpayer to severe civil and criminal penalties. Any non-intentional and knowing failure to file a violation may result in a $ 10,000 fine. Penalties for each intentional violation can be the largest of $ 100,000 or 50 percent of the amount in the account.

FATCA: A taxpayer with foreign financial assets of $ 50,000 or more must report this for FATCA purposes on Form 8938. It is recommended that hedge fund accounts invested in cryptocurrency and currency accounts denominated in cryptocurrency are listed in the summary information in Part I of Form 8938. Specific information must be given in Part V. FATCA non-compliance can tax taxpayers, heavy fines over undeclared foreign assets and exclusion from access to US markets, including a regulated cryptocurrency derivatives clearing market.

Financial gifts to cryptocurrency

A taxpayer can feel generous and decide to donate his cryptocurrencies to a tax code, section 501 (c) (3) exempt charity of their choice, to give the charity a great gift.

Since a cryptocurrency is considered a property for US tax purposes, it will be valued at the reasonable market value at the time of donation. Donors of cryptocurrencies of more than $ 500 – which are non-cash donations – will be required to comply with the IRS assessment requirements by submitting Form 8283. The donation is tax deductible as follows for the American individual donor:

Contributions to charities that are not deductible in the current year because they exceed the AGI limit of the taxpayer can be transferred for five years.

Cryptocurrency investment sold or exchanged at a loss

If a taxpayer held the cryptocurrency as an investment and sold it in 2018, it will be taxed just like bonds or shares at price gains, which is calculated by subtracting the cost of the asset upon purchase from the amount at which it was sold. That difference is usually levied at 15 to 20 percent for long-term investments, longer than one year, or at short-term interest rates, ranging from 10 percent to 37 percent. If the taxpayer is in the three highest income categories, he may also have to pay 3.8 percent tax on the net income from short-term investments, held for less than a year.

A taxpayer can use his cryptocurrency investment capital losses to offset profits and deduct the difference on his tax return, up to a maximum of $ 3000 per year. Cryptocurrency software services such as or can simplify the calculation of cryptocurrency investment gains and losses that are reported on Form 8949, which then becomes part of Form 1040 Schedule D of a taxpayer.

Any part of a capital loss that exceeds the $ 3000 annual limit can be transferred but not reversed.

According to a survey prepared by personal finance company Credit Karma, only about half of cryptocurrency investors who lost $ 1.7 billion in 2018 are planning to report their losses to the IRS.

Their reasons for staying still are partly related to the fact that they don't know if they can deduct their losses, believe they don't have to, or that they have failed to report cryptocurrency gains in recent years and are now scared to report their cryptocurrency losses.

Taxpayers who have failed to pay their cryptocurrency-related US taxes and submit their applicable US tax returns must do so by April 15, 2019, to avoid interest, fines and even imprisonment for tax evasion or, worse, tax fraud. , because "cryptocurrencies are an important part of the joint heads of Global Tax Enforcement work," said Don Fort, head of the Criminal Investigation Department at the IRS at a Joint Chiefs of Global Tax Enforcement meeting in Amsterdam, citing the risk that such coins are used in the US to prevent taxation.

Selva Ozelli, Esq., CPA is an international tax lawyer and CPA who regularly writes about tax, legal and accounting issues for tax filings, Bloomberg BNA, other publications and the OECD.

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