If you have a number of cryptocurrency trades, choose a trade accounting solution dedicated to coin transactions. The selected program should be able to calculate taxable income as well as loss according to the Internal Revenue Services (IRS) for coin transactions. It should also be able to generate capital profits and losses reports to back Form 8949 along with “other income” statements. The selected program need to keep a record for all coin transactions, including coin-to-coin trades, purchases of goods and services done with a coin, coin-to-currency trades, receipt of coin in a split transaction, and mining revenue.
In the below provided information, I have listed two coin accounting solutions that can do wonders. These are:
Both the accounting solutions offer options for different results and in general, use the default method to avoid IRS trouble.
Coin exchanges do not provide taxable income reports
Don’t rely upon coin exchange for any assistance with tax reporting as they don’t maintain cost-basis information and are unable to offer the users online tax reports. A coin is not a “covered security” for Form 1099-B issuance, therefore, coin investors as well as the IRS don’t receive a 1099-B.
Coin investors take care of generating their tax and accounting reports. Due to insufficient IRS guidance as well as uncertainty on tax treatment, most of the coin traders close under-reporting taxable income on coin transactions. It most of the cases, it could be inadvertent, but sometimes, it’s certain. Utilizing accounting software depicts an attempt to be compliant.
The IRS is pursuing coin investors
The Internal Revenue Service has given a “John Deo” summons to the most important coin exchange, Coinbase, to get its customers list for traders as well as investors making coin transactions worth $20,000 or more. The Internal Revenue Service figured out that less than 900 taxpayers reported profit and losses on coin transactions in the year of 2015, which a really small number.
With the hike in the price of coin in the year of 2017, the U.S Treasury asks tax revenues- its share of the windfall profits. This could be a reason the U.S Treasury named coin “intangible property” instead of currency. There would not be any taxable income or loss on the use of money.
The owner of the Bitcoin.Tax, Colin Mackie provided the complete information about their program to Robert Green from Forbes. According to that “Most coin exchanges allow a download of account history as a CSV file, and the Bitcoin.Tax get it,“ he said. “BT also has an API solution that works with some coin exchanges like Gemini and Coinbase, to download directly into BT”. So, the given study has been done by Robert Green keeping in mind what Mackie said. Have a look:
Colin Mackie said the program generates a number of downloads for capital gains, for example, Form 8949 PDFs, 8949 attachable statement, TaxACT import, TurboTax import and plain CSV. “For income, it’s a summary of income and mining per coin as a CSV,” he said. “For Section 1031 like-kind exchanges, it’s a statement of the appropriate lines from the Form 8824, one row per trade.”
The BT default method is to report capital gains and losses on coin-to-coin trades like trading Bitcoin for Ethereum. I suggest our clients use this default treatment to be compliant with IRS rules. The program offers an option to defer income and loss on all coin-to-coin trades by treating those trades as Section 1031 like-kind exchanges. If you select the like-kind exchange option, the BT program delays all taxable income or loss on these trades for the entire year until the user sells the coin for currency. Mackie said some accountants requested this option, but I strongly advise our clients against it. (See Cryptocurrency Traders Risk IRS Trouble With Like-Kind Exchanges.)
Mackie recommends BT users to pay careful attention to hard fork transactions, such as when Bitcoin distributed Bitcoin Cash.
“The coin exchange shows an addition to coin balances for the hard fork distribution, but some don’t include the new coin received in trade activity,” he said. “Sometimes BT picks it up automatically. Otherwise, it requires the user to add the new coin manually. The user can enter the new coin in as income using the daily price on the fork date. But, users also have the option to enter zero for cost basis.”
Sometimes a user doesn’t get a constructive receipt of the new coin, or the new coin doesn’t have a trading price on the day received. Report it as taxable income when accepted if you can determine it’s value. (See How To Report Bitcoin Cash And Avoid IRS Trouble.) BT offers a wide selection of accounting methods, which it calls basis methods, and I am not sure all of them will pass muster with the IRS. BT offers FIFO, LIFO, average cost, and specific identification.
Mackie says the specific identification method “uses strategies so the user may select the lowest cost, highest cost, or closest cost, where the program finds the best match to minimize capital gains.” That sounds like too much cherry picking after year-end. I think users should use acceptable accounting methods and select them in writing before the year commences.
I suggest our clients use FIFO to stay out of harm’s way with the IRS. This program feature of greater choice of basis method naturally leads to more income deferral and that will attract more IRS attention.
All that being said, I think BT is an inexpensive accounting solution that can work well for American taxpayers, provided they stay clear of the non-compliant options to defer income. Be sure that the program captures all transactions from the coin exchange.
BT is free up to 100 transactions, and it charges $19.95 per year when users exceed 100 entries.
CoinTracking.Info is another accounting solution you can choose. I spoke with CoinTracker founder and CEO Dario Kachel to learn more about this program. According to Kachel, CoinTracking is the only service with current and historical prices for all 4,878 coins on the market.
RG: Does CoinTracking (CT) generate a capital gains and losses report for American coin investors in compliance with U.S. tax law?
DK: Yes, it does. CoinTracking creates U.S. compliant tax reports such as Capital Gains And Losses on Form 8949, Other Income Reports, Gift and Donation Reports, Lost and Stolen Reports, and Closing Position. Reports can be exported in many formats like Excel, CSV, PDF and even in standard forms like Form 8949, Statement for the IRS, TaxACT, and TurboTax.
RG: Does CT account for all coin transactions, including coin-to-currency trades, coin-to-coin trades, receipt of coin in a hard fork or split transactions, and each time a coin investor purchases goods or services using a coin?
DK: Yes. We support all your mentioned transactions, which is necessary for a correct capital gains report. Also, we handle mined coins, income (e.g., a salary in cryptos), gifts, donations, and lost or stolen coins.