Cryptocurrency is often seen as a straightforward way to keep lucre to yourself without ceding a huge cut to the government. But in reality, it’s not so simple: If you’re a U.S. citizen and use crypto to buy anything, ever, the IRS requires you to report it, since it constitutes a “sale” of cryptocurrency. And right now, compliance is more important than ever. The IRS is taking steps to cross reference Know Your Customer data from exchanges like Coinbase to see which wallets are associated with which people. If you’ve been lazy, ignorant, or dismissive of compliance requirements, you may soon face significant penalties and interest. As soon as the IRS feeds this new data to its analytics systems, it will begin issuing the same types of letters that go to people who don’t include W2s in their tax returns receive, and those letters will include financial penalties.
New York-based Mario Costanz is the CEO at Happy Tax and CryptoTaxPrep.com, a service founded in 2017 to help cryptocurrency traders understand tax requirements and liability and get maximum deductions. Happy Tax’s research team keeps up with any changes on the state level, but the company has had to make some conclusions on its own. There isn’t a lot of guidance for tax practitioners on cryptocurrency—in fact, the only specific guidance is a notice the IRS issued back in 2014. With that in mind, Happy Tax launched Crypto Tax Academy, a series of self-study courses (including a free one) to help provide clarity for other tax practitioners.
BREAKERMAG spoke with Costanz about what crypto investors need to know to stay out of the IRS’s crosshairs—or even jail—and how losses from crypto trading in 2018 can be used to offset gains from other transactions.
What are the basics people need to know about crypto and accounting to stay out of trouble?
From a crypto trader’s perspective, many people, unfortunately, are noncompliant; they’re not including all of their trades on the tax returns. In 2014, the IRS deemed that crypto is property in context of taxation. Because of that, anytime you sell property, it’s a capital event, so you have capital gain or loss. When someone buys the crypto and sells it, it’s easy to understand that that should be included.
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But what many people don’t realize is that even if you use crypto to exchange that crypto for another crypto, that’s still a sale of the first crypto and has to be recorded as well. The key thing to know is that anytime you’re selling your crypto, even if you’re using it to buy goods or services, that is also selling that property in order to buy those goods and services. You have to include every one of those transactions in your tax return.
What are the consequences if you don’t?
You essentially have to pay back the taxes you avoided and all the interest, and possibly fines, seeing that it’s willful tax evasion. There could be criminal penalties as well. The IRS has an entire division called the Criminal Investigation division that goes after people for significant tax evasion or willful tax evasion. People go to jail for it every year. They clearly don’t throw average citizens who didn’t include a couple hundred bucks in jail, but if you’re talking tens of thousands of dollars, it’s very possible.
Many people don’t realize is that even if you use crypto to exchange that crypto for another crypto, that’s still a sale of the first crypto and has to be recorded.
Where else do people go wrong?
One thing people don’t realize is that there are foreign asset reporting requirements that both the IRS and Department of Treasury have. If you’ve got more than $10,000 in assets overseas, you need to report that both with your tax return and in a separate form that goes directly to Treasury. These forms are called FATCA and SBAR, and the fines for having accounts overseas over 10 grand or not including information on those forms starts at $10,000. They can go upwards of hundreds of thousands of dollars depending on the size or the amount of crypto that is being held overseas—and many of the exchanges are overseas. There are no taxes due on these forms; they’re just for reporting.
The IRS and Treasury put those together to make sure people aren’t funding overseas terrorist organizations for money laundering, so the penalties are stiff. We recommend that those are filed as well, and that’s one of the services that we provide.
Do you have any good news for crypto traders?
The losses that people may have had in 2018 from any transactions and capital losses could be claimed to offset other capital gains in the same tax year, or up to $3000 of other income with any remaining balance carried forward into future years.
What’s the most complex crypto tax situation you’ve had to sort out?
We’ve got a number of bot traders who have bots making trades based on algorithms, and because of that, they’re very high-frequency traders. In fact, one of our clients had over 250,000 trades last year. That was quite a challenge, but we got through it and were able to document everything and keep in compliance.