How to File your Taxes this Crypto Season

Unknown to most, crypto is taxable in almost all countries, but this might bring in some questions for many. Afterall, isn’t crypto outside the control of governments? Although technically true and given the anonymity provided by crypto, it’s no wonder many think there is no need to pay taxes on crypto. Let’s be honest, it’s hard for a government to track down and send tax notices to people holding crypto, and the lack of laws and regulations make it even harder to enforce any kind of tax regime on crypto. Despite all this, governments all over the world have recently stepped up their effort to collect taxes from crypto.

2014: IRS issues guidelines

In 2017, many got notices from the IRS to pay tax on their crypto holdings. This was something many had not expected, owing to the nature of crypto due to which many assumed it was a tax haven. On March 25, 2014, the IRS issued Notice 2014-21, which, for the first time, set forth the IRS position on the taxation of virtual currencies. According to the IRS Notice, “Virtual currency is treated as property for U.S. federal tax purposes.”  The notice further stated, “General tax principles that apply to property transactions apply to transactions using virtual currency.” This was the first time IRS has released guidelines on crypto and afterward has been trying to force crypto users to pay up their taxes. In order to identify users of cryptocurrencies, the IRS usually targets exchanges.

Chaos afterward

Since then, a lot of things have happened. Other countries have followed in trying to bring some kind of tax structure to crypto. This has resulted in chaos as most countries classify crypto differently. Some countries classify virtual currencies as currencies while others classify it as a commodity. This also means that these countries apply different taxes creating a compliance nightmare for companies involved in cross border trade. Compounding to the trouble is the fact that within countries itself, regulations are almost non-existent or vague. This has led to many demanding newer regulations in order to facilitate capital flow into the industry.

IRS guidelines

The IRS considers exchanging cryptocurrency for fiat money, or “cashing out” taxable money. Also, paying for goods or services, such as using Bitcoin to buy a cup of coffee will attract tax contrary to popular belief. Exchanging one’s cryptocurrency for another cryptocurrency is also taxable, and finally, one has to pay tax for receiving mined or forked cryptocurrencies. The following are not taxable events according to the IRS: buying cryptocurrency with fiat money, donating cryptocurrency to a tax-exempt non-profit or charity, making a gift of cryptocurrency to a third party and transferring cryptocurrencies between wallets.

Compliance headache

As mentioned before the vague regulations surrounding crypto can cause problems for companies dealing with crypto, especially since the inherent volatility involved makes valuation and indirectly taxation a lot more complex. Let’s take the example of Starbucks which has recently announced it has received significant equity in Bakkt platform. In return, Starbucks will use the platform to accept payments made in crypto. This creates a huge problem of taxation. Starbucks might be able to get around compliance but the customers will have a lot of work to do while filing tax returns. Customers will need to work out the value [of a Bitcoin] at the time [of a coffee purchase] versus the fair-market value [at the tax-filing time], and then need to itemize the gains or losses. It’s a lot of work considering the fact that it’s just to buy coffee.

This lack of clarity and transparency surrounding taxation has hampered growth in the industry. Many are hesitant and that too for good reason. Any misstep that could invite a tax bill could be crippling. A need for clear regulation and tax guidelines is something that should be implemented soon and necessary for the industry’s growth. In the meantime, investors have to be very wary and cautious as to how they proceed with tax returns in order to stay out of trouble. In most countries, filing a false tax report could eventually land you in jail.
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