Filing Cryptocurrency Taxes Is No Walk in the Park

Users of Bitcoin and other digital assets may refer to them as currencies but the United States' tax collector, the Internal Revenue Service (IRS) considers virtual currencies property, or assets similar to stocks. Taxpayers may find it difficult to accurately report their returns, however.

According to the IRS's N-14-21 Notice, a document which lays out guidelines and rules for cryptocurrency investors, many Americans who dabbled in cryptocurrencies during 2017’s market boom are liable for capital gains taxes andmay owe the IRS more than what their digital asset holdings are currently valued at due to the 2018 bear market.

US tax law, unfortunately, does not take a dip in an asset's value into account when it comes to giving Uncle Sam his due, only the value the asset gained. This puts cryptocurrency investors who opted to defer their tax payments to October, as opposed to paying in April, in an uncomfortable position.

Investors are only obligated to report crypto asset gains in a case where they’ve converted all, or some, of their digital asset holdings to fiat, traded them for goods or services, or exchanged them for other digital assets. Persons reporting crypto asset gains will be expected to report the difference between basis price (the price at which the assets were aquired) and proceeds (the price at which said assets were sold).

The process appears simple enough at first glance, however this is where the lack of cryptocurrency regulation and standards rears its head. According to a report by Messari, reporting one's returns could prove rather cumbersome.

In order to accurately report gains for tax purposes, digital asset investors have to gather and sift through their transaction history from exchanges and wallets (the average cryptocurrency investor uses multiple platforms), Identify trades and separate them from non-taxable activity, like moving funds from one wallet to another. Following the accomplishment of this feat, one still has to, as accurately as possible, calculate their dues to the tax man.

Investopedia offers a Cryptocurrency Tax Guide for digital asset investors going for the DIY option on doing their taxes, while tax software services LibraTax, Coin Tracker, Profit stance and others go some way towards making the process more manageable.

The IRS, earlier this year, indicated their commitment to enforcing cryptocurrency taxation laws when they had Coinbase hand over the details of some 13,000 users. US-based investors will likely want to be on the right side of the law in this regard.