Investing in or trading cryptocurrencies can yield handsome profits for those who are smart, learn the ropes, use common sense, and/or are just plain lucky. A serious issues arises for folks who are making money in this investment and trading niche but are not paying attention to the requirements of the Internal Revenue Service. Many are attracted to crypto because of the relative privacy of transactions. A bank or brokerage is not looking over your shoulder and being nosey regarding your personal business. But in the hustle and bustle of active trading it can be all to easy to forget that money made in the crypto world by US taxpayers is subject to capital gains taxes. What happens if you do not report your crypto capital gains?
What Are Capital Gains?
If you buy something and subsequently sell it for a profit or loss you will have experienced a capital gain (or loss). Capital gains are subject to taxes in the USA and in all fifty states. The amount of tax will depend on how long you held on to the asset between its purchase and its sale. Profit from any asset such as a cryptocurrency, share of stock, or real estate that you hold for less than a year will be considered a short term capital gain. Anything that you hold for more than a year before selling for a profit will be a long term capital gain. This distinction is important because taxes imposed on short term gains are significantly higher than those imposed on long term gains.
INTERNAL REVENUE SERVICE
How Much Are Capital Gains Taxes?
Long term capital gains are taxed at zero, fifteen or twenty percent depending on filing status and income. Short term capital gains are taxed at the same level as ordinary income namely ten to thirty-seven percent based on filing status and income. A retiree with no steady outside income who sells stocks, real estate, or other assets that they have held for many year will pay a significantly lower capital gains tax than a working individual in the top tax brackets who is making money by trading cryptocurrencies and holding tokens for hours or even minutes before selling for a profit.
How to Keep Track of Crypto Capital Gains
A busy crypto trader can use tools like Coin Tracking, Delta.app, Koinly, Crypto Ledger, or CoinStats. Such applications track trades and relieve you of the work and worry of trying to remember every single trade, its profitability or loss. The important part is that you do keep track of your gains and losses throughout the year and report them when you file your taxes. An important part of keeping track of gains and losses is reporting the cost basis of an asset (what you paid for it). If you neglect to report the cost basis it is possible that the IRS will consider all of your sale to be short term profit and not just actual profit part!
Doesn’t Everyone Report Their Crypto Capital Gains?
According to Forbes crypto news, IRS data indicates that only a third to a half of US crypto owners report their capital gains. This represents a significant problem for those not reporting crypto gains. If you do not report you may be audited by the IRS. You could end up paying seventy-five percent of the total tax due on top of having to pay the delinquent tax. Fines can run in excess of a hundred thousand dollars and you will probably need to pay interest on what you owed and had not paid. To the extent that your not paying constitutes willful fraud you could end up in a federal prison on top of all of the fines, interest and monetary penalties.