After several years of buying crypto, 2017 marked the first year in which I sold any.
Having finally taken some profits, I then wondered:
Should I even pay taxes on my trading?
What does the IRS consider a taxable event?
How am I going to organize and calculate taxable events across hundreds of trades?
I found a lot of conflicting information online, but after much research, a consultation with a crypto tax specialist, and with the help of a very cool online tool, I now have my crypto tax ducks in a row.
In this article, I'll share what I learned, which will hopefully help you more easily manage your taxable crypto trading events in the coming years.
Should I even pay taxes on my trading?
In my opinion, yes! Profits taken through trading crypto are most definitely considered capital gains by the IRS, and after the banner year that 2017 was for the space, coin traders are definitely on their radar.
Even as far back as 2016 the IRS sent a summons to Coinbase demanding data for 500,000 users:
https://support.coinbase.com/customer/portal/articles/2924446
Though Coinbase scored a partial victory in paring the order down to just 13,000 users, this is still a clear indicator that the IRS is now watching the space closely. How you manage taxes is of course entirely up to your discretion, but I believe that those who choose not to pay them on their crypto earnings are going to have a bad time down the road. Better to do things right now, and approach your crypto earnings like any other legitimate investment income.
What does the IRS consider a taxable event?
According to the crypto tax specialist I consulted, the following are taxable events:
If you sell crypto for a profit it is considered capital gains (short-term for coins you held for less than a year, and a potentially more forgiving long-term rate for those you've held longer than a year).
If you buy something with your crypto, this is also taxable, assuming it was worth more when you used it for a purchase than it was when you originally bought it. An example here would be the tax consultation I got, which I paid for with BTC. The cost was $100 worth of BTC (about .01 at the time). Since that .01 BTC only cost me around $4 when I bought it, that purchase represented $96 worth of capital gains.
Coin-to-coin trades are definitely a taxable event. If you make a favorable trade from one coin to another, capital gains taxes are due for the 'profit' you took. So, if you purchased 1 BTC, then traded that for a stack of XMR after the price of your BTC doubled, taxes would be due on the 100% gain in BTC value. You will find a lot of conflicting information about this online, but the 'like-kind loophole' you might read about was closed in 2018, and even before then it was shaky.
Mining proceeds are considered ordinary income, on the day you took possession of the crypto. For example, if you use a pool like Nicehash, and are paid out every time you accumulate .001 BTC, the value of .001 BTC on the day you are paid out to your pool wallet is the amount of income. Hardware and power costs should be deductible.
How am I going to organize and calculate taxable events across hundreds of trades?
Once I verified that coin-to-coin trades were a taxable event, it became a huge cause of anxiety for me. I had hundreds of trades on various exchanges, and figured I was looking at a solid week of pouring over spreadsheets and diagramming the flow of coins to even have half an idea what 'profits' I took.
Then, I found bitcoin.tax, and I swear angels started singing at that very moment:
This platform is free if you don't trade much, and a very reasonable cost per year if you work with a higher trade volume. It enables you to import your trade history from most popular exchanges (such as Coinbase, Binance, Kraken, and Poloniex), and then calculates capital gains for you. You can also manually enter things like coins purchased other places, purchases you made with your crypto, and mining proceeds.
It also provides some nice reports to help you clearly see your buys, sells, weighted prices, and current positions, and an exportable spreadsheet to include with your taxes, or file you can import into platforms like Turbotax. Additionally, you can find a directory of crypt tax professionals who can offer you tax services in your area.
Hopefully the above has helped answer some of your crypto taxation questions. Feel free to comment below with any insight you have to add !
Disclaimer: I am not a tax professional. The above is the result of my own research, an although it does outline the exact criteria and tools I used to determine how to handle my crypto taxes, how you decide to handle your own is entirely up to your own research and discretion.