Crypto Tax Issues

Nov 25, 2021

Cryptocurrency tax reporting

Written by: David Waxman

 

If you are investing in crypto currencies, then protect your investment by staying in compliance with the tax authorities.  This includes the IRS and the Israel Tax Authority.  The guidelines below are per IRS guidelines.  For Israel and other authorities, check with your local tax accountant.

On your form 1040 tax filing, you will need to report crypto in the three areas detailed below.

  

(1) Say Yes

Form 1040 page 1:

Say “yes”.  Just below name and address, Form 1040 asks: “At any time in [year], did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Per the IRS FAQ, you do not need to check yes if all that you did was purchase with no exits or exchanges.

 

(2) Capital Gains and Losses

Form 8949 and schedule D:

 Report these types of transactions on form 8949 and then summarize on schedule D:

    1. Converting crypto to any fiat currency (USD or ILS etc)
    2. Exchanging one crypto currency for another. For example, using Bitcoin to purchase Ethereum or to purchase tokens.  For tax purposes, you just sold one and bought the other.
    3. Spending your crypto on goods or services. The fair market value is your exit (proceeds) price.  Avoid small purchases to avoid excessive reporting.

What data do I need?

    1. Cost basis – how much did you pay or exchange to acquire the crypto?
    2. Date acquired and date sold. More than one year held is reported as long term and otherwise short term.
    3. Proceeds – value in USD at the time of exit
    • TIP – If you have more than a few transactions then the bookkeeping can quickly become overwhelming. Use an application such as cryptotaxcalculator.io or bitcoin.tax. You can also submit your data in CSV format and we can handle it for you.

 

(3) Regular Income

Schedule 1, schedule B, schedule C:

These transactions are considered regular income:

    1. Mining
    2. Staking
    3. Airdrops
    4. Payments for goods or services

What data do I need?

    1. Date of transaction and value (for cost basis and purchase date)
    2. The value is also your income
    3. Expenses (if you are engaged in self-employment)

 

Tips and legal tricks

    1. HODL for at least one year. If you are not HODL’ing (hold on for dear life), then at least HODL for one year to obtain lower tax rates. (Unfortunately in Israel this won’t help you).
    2. Charity – donate your crypto to a worthy organization that is recognized for tax purposes. This will avoid the capital gain if you held for over a year, and you will also be able to itemize the deduction.  This will only help you if the itemized deductions exceed your standard deduction.
    3. Don’t forget losses! They can be carried forward to offset profits in the future.
    4. Take losses. The 30 day wash rule applies to securities only and crypto is not a security (it is a property).
    5. Avoid taking gains. You might want to delay exiting from a position until after January 1 to delay the tax burden another year.
    6. HODL till you die. US tax laws allow the beneficiary of an inheritance to take a stepped up cost basis.  Unfortunately, Israel does not allow this benefit.

 

Cole & Waxman is happy to keep you in compliance with your crypto trading.  Send an inquiry to yitz@colewaxman.com for more information or use the contact us form.

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