For many people, one of the most attractive features of buying and selling cryptocurrencies like Bitcoin and others has been that profits have been “off the radar.” The system has provided a welcome anonymity to financial transactions. And it has allowed those who chose to, to avoid declaring or paying any taxes on capital gains from trading in cryptocurrencies. However, those days seem to be coming to a close. And, many may need help with tax resolution for cryptocurrency trading profits.
The Internal Revenue Service successfully sued a cryptocurrency exchange based in San Francisco, Coinbase. These folks operate cryptocurrency exchanges for Bitcoin, Bitcoin Cash, Litecoin, Ethereum Classic, and Ethereum. The IRS won the case and Coinbase had to turn over its list of customers. Subsequently, Coinbase sent out 1099-K forms to more than fifteen thousand people who had traded cryptocurrencies on their exchange. The 1099-K is for Third Party Network and Payment Card Transactions. A lot of folks are going to need to pay back taxes and perhaps penalties on monies they gained buying and selling cryptocurrencies.
It has been estimated that as many as fifteen million US taxpayers will need to ante up on back taxes, and perhaps more as other governments force cryptocurrency exchanges to turn over their customer lists.
People who got into Bitcoin back in the dark ages (2010) paid a few cents for one Bitcoin. This cryptocurrency and others have taken off and, for example, Bitcoin peaked at the end of 2017 at $17,900. It now is worth less (around $6,400) as are all cryptocurrencies. But, the point is that anyone who bought way back then and cashed out recently is likely to have a significant tax liability. And, anyone who has simply held on to their cryptocurrency has a significant tax liability in store for them when they sell. In both cases, folks need competent tax advice and help with tax resolution from experts like Exigo Business Solutions.
The first thing your tax advisor will have you do, or do for you, is to figure out your capital gains liability for each tax year that you sold a cryptocurrency. A standard method is called first in, first out or FIFO. This is a simple approach but may not be the best for you. Alternatively, you can track down each and every sale and match it to a specific purchase. This may work out better but it is a detailed approach. And, there may be better approaches that your tax advisor may suggest.
To resolve issues with the IRS, individuals will need to go back through every tax year and declare whatever taxable gains they may have had. Of course, if you bought Bitcoin at $17,900 last year and sold last week at $6,400, you will have a loss to declare on your taxes!
And, to say the least, the IRS may not be happy with you for neglecting to pay taxes over the last few years. In fact, they may not see this as an oversight but rather as an attempt to cheat on your taxes. As such, this is not a good time to go it alone and hope for the best. Rather, you need an expert at your side, like Exigo Business Solutions.
Depending on your situation, there may be penalties, tax liens, and levies in addition to simply having to pay back taxes. Your tax advisor can represent you with the IRS and can help arrange installment payments instead of a one-time payment.
If you bought Bitcoin or any digital currency years ago, you probably have the potential for a big profit if you sell now. It is your choice if you want to buy or hold your cryptocurrency. But, it would appear that eventually, the IRS is going to know about your transactions. So, you need to talk to a competent tax advisor to decide how you are going to handle past transactions that have not yet come to light. And you need to talk to your same tax expert to decide how to deal with taxes today before the IRS has your name from your cryptocurrency exchange!
Don’t try to wing this potential problem on your own. Get competent advice and stay out of trouble with the IRS or follow the counsel of your tax expert and minimize your current issues of back taxes and potential penalties.