It’s my annual “Taxes from A to Z” series! If you’re wondering whether you can claim home office expenses or whether to deduct a capital loss, you won’t want to miss a single letter.
K is for Kin (Crypto)
Kin (KIN) is a digital currency created to incentivize users to interact with Kik, an instant messaging app. Kik announced its debut on May 25, 2017, describing the new cryptocurrency as “designed specifically to bring people together in a new shared economy.” Kin was implemented on the public Ethereum blockchain as an ERC20 token.
As a cryptocurrency, Kin is similar to Bitcoin (BTC). Like Bitcoin, Kin has monetary value, though the intent is focused on trading for goods and services on the Kik platform rather than investing. In fact, Kik envisions that Kin will hold “real value both inside and outside of the chat application.”
Kik is one of more than 1,600 cryptocurrencies available today. Some currencies like Bitcoin, Ethereum (ETH), and Ripple (XRP) have names that people recognize. But others, like VeChain (VEN), Nano (NANO), and Zcash (ZEC) are just picking up steam as interest in crypto and digital currencies grows. Unfortunately, the relatively meteoric rise of many of these currencies means that guidance – both in terms of investing and taxes – may be limited. If you’re tempted to dip your toes into the crypto world, here’s what you need to know for federal income tax purposes.
The first thing to understand is that just because you don’t physically hold cryptocurrency in your hands (or in your non-virtual wallet) doesn’t mean that it’s not taxable. In 2014, the Internal Revenue Service (IRS) issued guidance to taxpayers (downloads as a pdf) making it clear that virtual currency is taxable and is treated as a capital asset, provided that it can be converted into cash. This doesn’t mean that the currency has to be converted into cash, just that it can be.
Capital asset treatment means that for taxpayers buying and selling cryptocurrency as an investment, calculating gains and losses are figured the same as buying and selling stock. For those taxpayers treating cryptocurrency like cash – spending it directly for goods or services, or using it to buy other cryptocurrencies – the individual transactions may result in a gain or a loss.
At tax time, you’ll report realized gains and losses on a Schedule D, Capital Gains and Losses (downloads as a pdf). You’ll transfer those numbers to the front page of your federal form 1040. There’s no need to file a Schedule D if there are no realized gains or losses (even if the value changes, if there’s no sale or other disposition, there’s nothing to report).
Schedule D assumes that reporting isn’t complicated. If all of your forms 1099-B (statements from a brokerage showing sales price and basis) are complete with no gaps, then a Schedule D will suffice.
But today’s tax world hasn’t necessarily caught up to today’s digital world. Most of the time, proceeds and basis from sales or exchanges of crypto aren’t reported to you on a form 1099-B. If that’s the case, you’ll need to file form 8949, Sales and Other Dispositions of Capital Assets in addition to a Schedule D.
For most taxpayers, the focus is on Part I of the form, used for Short-Term transactions. That’s because crypto is often used and traded throughout the year and not merely held for investment. And a transaction isn’t limited to a sale: Anyone using cryptocurrency to pay for goods or services must treat each purchase as a sale. Ditto for trading one cryptocurrency for another.
The line between long-term and short-term is a bright one. If you hold an asset for more than one year before a taxable event, it’s considered a long-term gain or loss. In contrast, if you hold an asset for one year or less before a taxable event, it’s considered a short-term gain or loss.
If you’re lucky enough have a form 1099-B reporting your transactions, you’ll tick box A or B on the form 8949. But in most cases, you’re going to check box C because there is no form 1099-B for crypto transactions since the IRS doesn’t require third-party reporting for virtual currency. Some companies, like Coinbase, will offer a summary of transactions which can be used to help you file your taxes but if you withdraw cryptocurrency from an exchange, the exchange can no longer track when happens. In that event, cashing cryptocurrency out of an exchange or similar platform may be treated as a sale.
You’ll report the property, date of acquisition, date of sale, sale price and basis (cost that you paid plus any adjustments) on the form, line by line. You’ll figure your capital gains (and losses) by calculating how much your basis has gone up or down from the time you acquired the cryptocurrency until there’s a taxable event (disposition/sale/exchange). You’ll then net your gains and losses, and pay any tax due.
For a deeper dive on crypto and taxes (with some examples), check out this article.
If you’re tempted to skip reporting at tax time, don’t. The IRS is increasingly interested in taxpayers who use crypto and have taken note of the disparity between market transactions and reported transactions. As a result, the IRS is aggressively pursuing crypto as a compliance target. Their first shot across the bow was largely a success: They recently won the right to access some of Coinbase’s customer data.
For your taxes from A to Z, here’s the rest of the series: