Bitcoin & Crypto Taxes In US: When to Sell and When to Hodl. | Crypto Land
Bitcoin & Crypto Taxes In US: When to Sell and When to Hodl.
That was then, this is now
Sharon Yip, certified public accountant (CPA), a crypto tax advisor working closely with crypto tax software company CoinTracking, spoke about the tax dynamics for crypto investors. Yip, whose practice is dedicated to helping cryptoasset investors and blockchain companies dealing with crypto taxes, explained how in 2018, many people weren’t prepared to pay crypto-related taxes.
Many investors lost money as their portfolios tumbled in value. And when tax time came around, she said, they didn’t have the money to cover the bill. So they either intentionally avoided reporting their crypto transactions or simply didn’t know how to.
Now many of those investors are in hot water after receiving notices from the US Internal Revenue Service (IRS) related to 2018. This effort came as a result of US crypto exchanges like Coinbase issuing 1099-K forms to certain customers, which allowed the tax agency to match the forms with individuals who didn’t report their taxes. Investors whose crypto payments exceed USD 20,000 or who have completed more than 200 transactions are the recipients of a 1099-K.
“This is very serious. Based on the people who received the tax notice and contacted us for help, we’ve seen a range of tax assessments go from USD 45,000 to USD 1.5m based on sales proceeds once you throw in penalties and interest,” said Yip, adding that every single time you trade, it adds up. “It’s like a snowball that keeps rolling bigger.”
Taxable event
The IRS classifies cryptoassets as property. Yip’s advice to investors who are looking to capture a profit in this bull market is to have a clear idea about gains and losses and not to make assumptions. CoinTracking advises clients to make tax projections to gauge how much they might owe. Even if you have a full-time job with a W2 and just trade on the side, it might not be enough to cover taxes for capital gains. As a result, you could end up with a large balance due, which could trigger penalties for underpayment.
First and foremost, Yip explained, investors should know that every crypto transaction is a taxable event. The only time it’s not taxable is if you purchase crypto with fiat money, which is akin to buying stock. But if you are buying one crypto with another crypto, it’s a taxable event.
“It’s a two-step transaction. For example, if you’re using BTC to buy EOS, you are treated as if you are selling BTC for USD and then use the USD to buy the second coin, EOS. This situation will recognize a tax gain or loss,” explained Yip.
“People are not prepared and have no idea how to handle this. Whether they pocket the profits or invest in other coins that could go higher, people really need to be prepared for the tax consequences. I’m shocked how people thought as long as they didn’t cash out, they don’t have to pay taxes.”
She gives the scenario of an investor buying BTC at USD 5,000. Now that it’s trading at USD 23K, they might sell it and use the proceeds to buy another coin. Even though they put zero cash back in their pocket, it’s a taxable event.
“From the IRS’ perspective, it’s the same whether you sold at USD 23,000 and pocketed the money or turned around and bought another coin. It’s your choice,” Yip said.
It is a common belief that the majority of crypto investors didn’t report their crypto transactions on tax returns, and as Yip noted, the government needs the money now more than ever with all of the stimulus it is giving away.
“This is an area where they can go after people and get their money back,” she said.
