WHAT INVESTORS DON’T KNOW ABOUT TRACKING CRYPTOCURRENCY FOR TAXES AND HOW IT WILL HURT THEM
Here at Camuso CPA, we offer a wide array of tax and accounting services for cryptocurrency investors and traders including tax preparation, tax planning and portfolio reconciliations.
How It Works
How you report the cryptocurrency transactions will depend on how long ago you bought your cryptocurrency and on the price at which you purchased it.
If you’ve held the crypto for less than a year before transacting with it, it’s taxed as a short-term capital gain, which is still taxed at the same rate as ordinary income. But if you’ve held crypto for longer than a year before using it, it is taxed as a long-term capital gain at lower rates.
As discussed before, the IRS requires that taxpayers report the fair market value of their coins – in a reasonable and consistent manner – on the date of purchase. The fair market value reported by a taxpayer disposing of cryptocurrencies should serve as the additional cost basis for the new taxpayer acquiring the currency.
This is easier said than done because taxpayers tend to report conflicting cost basis that maximize personal tax advantages. As you can see tracking cost basis is a cumulative process.
How This Impacts Taxpayers
Properly tracking and reporting your cost basis is imperative to protect your assets from penalties and interest as a result of underreporting.
When analyzing cryptocurrency portfolios our starting point is the last ending tax year’s cost basis for each asset which is considered along with all relevant transactions from the current year to arrive at both an ending tax liability and ending cost basis for each respective asset you are holding.
This means that if you did not track your cost basis correctly in prior years or did not report it that your portfolio calculation for years following that will also be incorrect.
It is clear that, with the huge price declines in cryptocurrency markets during 2018, many people will be considering harvesting losses and reporting this for a tax benefit.
If you did not report crypto activity up to now or tracked your cost basis improperly, those choosing to reveal losses this year will be at a high risk of audit and tax penalties. Taxpayers that have not previously reported will also need to report their crypto transactions every year going forward.
Patrick Camuso, CPA is founder and owner of Camuso CPA, a Charlotte, NC based CPA firm consulting to cryptocurrency investors, miners and business nationwide.