US Crypto Tax Prep Guide

U.S.
Crypto
Tax Prep
Guide

 CryptoTaxPrep.com


C r y p t o t a x p r e p . c o m U . S . C r y p t o T a x P r e p G u i d e

Join our Facebook conversation: https://www.facebook.com/groups/cryptotaxsupport/ 2

1. INTRODUCTION
2. WHAT IS CRYPTOCURRENCY
3. WHAT IS TAXABLE
4. FOREIGN-HELD ASSETS
5. CRYPTO GIFTS
6. POTENTIAL PENALTIES FOR NOT REPORTING
7. RECORD KEEPING
8. STAYING INFORMED
9. ABOUT HAPPY TAX

TABLE OF CONTENTS

LEGAL DISCLAIMER
The information in this document is provided for informational purposes only. The information is not
legal advice, and should not be treated as such. You must not rely on the information in this document
as an alternative to legal advice from your attorney or other professional legal services provider. If you
have any specific questions about any legal matter you should consult your attorney or other professional
legal services provider. Use of and access to this document or any of the e-mail links contained herein
do not create an attorney-client relationship between Happy Tax and the user or reader. The opinions
expressed at or through this site are the opinions of the individual author and may not reflect the opinions
of HappyTax or any individual at the firm.


 C r y p t o t a x p r e p . c o m U . S . C r y p t o T a x P r e p G u i d e

Join our Facebook conversation: https://www.facebook.com/groups/cryptotaxsupport/ 3

INTRODUCTION
Millions of people invest in cryptocurrencies, to the tune of billions of dollars in trading volume
worldwide. With the increasing legitimacy of Bitcoin and other cryptocurrencies, these assets are
becoming more and more popular in the investment world. However, most people aren’t sure what
virtual currencies are, how they work, or how they impact their tax liability.
If you’ve bought or sold cryptocurrency this year, you may be wondering how – or whether – you
should report your earnings or losses to the IRS. A q ualified cryptocurrency accountant has the
skills and expertise to guide you through the upcoming tax season in a manner that limits your tax
exposure and gives you critical peace of mind about your financial security. The licensed Certified
Public Accountants at Happy Tax have been trained on the latest rules and regulations affecting
cryptocurrency investors, and the company has become a one-stop-shop for all of your needs this
tax season.
Before you dive in, however, here are some frequently asked questions that many cryptocurrency
investors may want to consider.


C r y p t o t a x p r e p . c o m U . S . C r y p t o T a x P r e p G u i d e

Join our Facebook conversation: https://www.facebook.com/groups/cryptotaxsupport/ 4

WHAT IS CRYPTOCURRENCY
Cryptocurrency – also known as digital currency, virtual currency, coins, or tokens – is a type of
electronic payment. It doesn’t exist in physical forms, like traditional bills and coins, but it can be
used to purchased goods and services.
Some tokens are restricted to certain online communities, while others are increasingly available as
retail payment methods in lieu of cash or credit cards. Many tokens have utility cases built around
them to perform specific functions.
They are referred to as cryptocurrency because it is built on cryptography which uses math to hide
secrets. It has a history as old as the world but computing technology has really advanced its uses
in recent years.

WHAT IS TAXABLE
In what year did cryptocurrency become taxable? The IRS has treated cryptocurrencies
as taxable assets since 2014.
Do I have to report cryptocurrency transactions to the IRS? Yes. Contrary to popular
belief, you must report cryptocurrency sales and exchanges on your tax return. If you’ve bought
or sold cryptocurrencies in the past tax year, you must include these transactions in your return.
Are crypto-to-crypto trades or exchanges taxable? Yes, they are NOT excluded from
taxation as like-kind exchanges. They are considered to be the exchange of one property for another,
which is a taxable event.


 C r y p t o t a x p r e p . c o m U . S . C r y p t o T a x P r e p G u i d e

Join our Facebook conversation: https://www.facebook.com/groups/cryptotaxsupport/ 5

What if I sell my coins or tokens for traditional money or buy something with
my coins? Is that a taxable event? Yes, that is a taxable event.
What about privacy coins? Are those taxable? Yes. It doesn’t matter if you’re on a private
blockchain or using a coin that has enhanced privacy features like Dash or Monero. You must
report transactions related to privacy coins on your return.
Are mining earnings taxable? Yes, they are taxable as self-employment income. Mining
is the decentralized service of approving transfers and updating registers. It is a service that is
rewarded with value. The value of the coin needs to be reported at the time of receipt. You may
also have a capital gain/loss on the coin at the time of sale.
Can I write-off the cost of mining equipment? The equipment you buy will be
depreciated like any business would depreciate their equipment. You can also write-off a portion
of your electric bill and, depending on the space you are using, a portion of your depreciation for
your home, etc. If you purchase a cloud mining contract it follows the same process. Your income
gets reported and the cost to purchase the contract is your expense.
Are profits from ICOs taxable? Regardless of the asset, the triggering tax event is when you
sell it. If you purchase an ICO and hold it for years, you only report capital gains in the year you
sell it.
If my employers pay my wages in cryptocurrency, are my wages taxable? Yes,
wages paid in virtual currency denominations are taxable to the employee. Typically, an employer
must report the wages on a Form W-2, just like wage payments in traditional money. Virtual
currency wages are subject to federal income tax withholding and payroll taxes.
If I received cryptocurrency for work I did as an Independent Contractor, do I
have to pay taxes? Yes, just like cryptocurrency wages, payments to independent contractors
are subject to the same tax rules most of us are already familiar with. Digital currency payments
to independent contractors are taxable as self-employment income. The person or business who
contracted the work must issue a Form 1099 for any payments of $600 or more, and freelancers
should report this income on a Form 1099-MISC.
What value should I report as earnings -- the value at the time the payment
was made or the current market value? Cryptocurrency wages, self-employment income,
or other payments should be reported using the full fair market value of the cryptocurrency at
the time the payment was made. So, for example, if you are paid one Bitcoin when the price was
$10,000, but the price increased to $12,500 by the time you file your taxes, you report the income


C r y p t o t a x p r e p . c o m U . S . C r y p t o T a x P r e p G u i d e

Join our Facebook conversation: https://www.facebook.com/groups/cryptotaxsupport/ 6

as $10,000. The value you report as earnings becomes the cost basis to calculate the capital gains/
losses when you later sell or exchange the coin.
Are virtual currency winnings from gaming taxable? Yes, more and more gaming
websites accept Bitcoin and other cryptocurrency and those winnings are taxable.
Are gambling winnings taxable? Yes, cryptocurrency gambling winnings are taxable. In
general, the IRS requires 25% of all gambling winnings to be withheld as taxes. Sometimes, the
agency requires a “backup” withholding of 28%. Casinos and gaming sites may withhold these
taxes for you. In these cases, they provide gamblers with a Form W-2G, which they use to report
how much they won and how much tax was withheld. However, even if you don’t get a Form W-2G,
you are responsible for reporting all gambling winnings to the IRS.
If you’re a professional gambler, tax rules are slightly different. Professional gambling income
is typically taxed at the effective income tax rate rather than the 25% applied to most gambling
wins. In order to be sure of which tax rules affect your gambling income, be sure to consult with a
qualified tax professional.
For tax purposes, is there a difference between getting paid in cryptocurrency
and trading cryptocurrency? Yes, the IRS characterizes cryptocurrency based on what you
intend to do with it.
How are cryptocurrency payments categorized for tax purposes? If you received
cryptocurrency payments in a trade or business – like being paid for your services or for sales of
intellectual or tangible property – they are taxed as income based on what the cryptocurrency was
worth on the sale date.
How are cryptocurrency trades categorized for tax purposes? If you’re trading
cryptocurrency like stocks or other securities, then the capital gain and loss rules apply. In these
cases, the IRS treats Bitcoin and other virtual currencies as intangible property , so cryptocurrency
transactions follow the general principles of property taxation. So, for example, if you held it longer
than a year, it’s a long-term gain that has more preferential treatment than short-term gains.
Since the bottom two tax brackets pay 0% capital gains tax for lower income earners, this has made
cryptocurrency an attractive option when it hits peaks and early adopters didn’t pay much for the
first few issuances of Bitcoin and Ethereum.
Short term capital gains are taxed at a higher ordinary income tax rate so any transactions of coins


 C r y p t o t a x p r e p . c o m U . S . C r y p t o T a x P r e p G u i d e

Join our Facebook conversation: https://www.facebook.com/groups/cryptotaxsupport/ 7

that weren’t held for a year will cost you more in taxes.
Tax rates are changing with the federal tax reform coming in 2018, so be sure that you’re up to date
on how the new laws affect your investment.
Do I have to pay taxes on coins I received due to a fork of another coin? No, these
are treated like stock splits and no reporting is needed until you sell or swap the forked coins.
Why does the IRS tax cryptocurrency as property rather than legal tender? In
many ways, cryptocurrency operates just like legal tender. It can be exchanged, used for purchases,
loaned out or given away. It is a store of value and a medium of exchange, but it is not considered
legal tender in any U.S. jurisdiction.
In the United States, the federal government is the only entity that can officially create money,
and it has established the dollar as the legal tender. Unless Bitcoin or some other virtual currency
legally replaces the U.S. dollar under federal law, it will be taxed as property or some other similar
asset.
If I make or take out a loan using cryptocurrency, does this impact my taxes?
More financial services are available using Bitcoin and other cryptocurrencies every day. Like
many of the more nuanced tax issues surrounding cryptocurrencies, your tax exposure depends on
the details and circumstances of the loan. If you’ve made or taken out a loan using cryptocurrency,
consult a specially-trained cryptocurrency accountant like the qualified professionals at Happy
Tax to make sure you’re disclosing everything the IRS requires.


C r y p t o t a x p r e p . c o m U . S . C r y p t o T a x P r e p G u i d e

Join our Facebook conversation: https://www.facebook.com/groups/cryptotaxsupport/ 8

When do I have to pay taxes on cryptocurrency? So far, buying digital currency is not a
taxable event in and of itself. But tax liability is triggered when you sell or trade a cryptocurrency.
If your cryptocurrency investment drastically appreciates in value after purchase, your taxes won’t
be affected until you sell. This applies regardless of whether you cash out for traditional currencies
like U.S. Dollars or Euros or whether you trade one digital coin for another.
Some traders are under the impression that cryptocurrency trades only become taxable if you
convert your coins to traditional currencies, like U.S. Dollars or Euros. This is not the case.
Rather, all digital money in your wallet or on an exchange after a sale is subject to potential tax
liability.
Do I have to pay taxes on cryptocurrency if I didn’t make any money on it this
year? No, if you sold at a loss you can deduct up to $3,000 per year in capital losses until that loss
has been used up. Harvesting losses is an effective way to cut your tax bill if you’re concerned about
being pushed into a higher bracket as far as your other assets are concerned.
It definitely can be a good idea to sell off any cryptocurrency that lost value if you’re hesitant to keep
holding it, and if you have capital gains to offset it against as a year-end tax planning maneuver.
Do I have to pay taxes on cryptocurrency that was stolen? No, investors are allowed
to write-off cryptocurrency thefts and losses. In some cases, the deductions allowed by these losses
can greatly reduce tax liability. This rule provides some peace of mind for the thousands of people
impacted by internet fraud, but it also creates the temptation to try and game the system.
Some investors may think it’s a good idea to pretend that their cryptocurrency was lost or stolen
in order to try to hide them from the government and take advantage of related tax deductions.
Aside from the ethical issues of such a strategy, lying to the IRS can land you in serious trouble.
Depending on the circumstances, you can be hit with staggering fines and penalties or even jail
time for intentional misrepresentation to the IRS.
At what rate will my cryptocurrency investments be taxes? The exact rate at which
your cryptocurrency investments are taxed vary based on criteria like how much other income


 C r y p t o t a x p r e p . c o m U . S . C r y p t o T a x P r e p G u i d e

Join our Facebook conversation: https://www.facebook.com/groups/cryptotaxsupport/ 9

you’ve made that year and how long you held the asset.

FOREIGN-HELD ASSETS
How does the US regulate foreign-held assets? In the United States, people who hold
funds in foreign bank accounts are subject to oversight by the Treasury Department’s Financial
Crimes Enforcement Network, or “FinCEN.” FinCEN collects and reviews information about
financial transactions in an effort to prevent the type of money laundering, terrorist financing, and
several other dangerous financial crimes.
Failing to file a Report of Foreign Bank Account (“FBAR”) is punishable by a penalty of up to
$10,000 per violation, even if the omission was accidental. If the agency finds the omission to
be intentional, these penalties jump to $100,000 or 50% of the foreign-held account balance,
whichever is greater. There can even be criminal charges brought against you and potentially time
in jail. It isn’t a subject you want to play with.
What if I only trade crypto on foreign exchanges? Do I still have to pay taxes? As a US
citizen you are required to report worldwide income. Every trade and sale generates taxable event
where capital gains/losses needs to be calculated. Since they are in a foreign exchange, if you are
over $10,000 in total you also have some additional reporting to do which has some serious fines
if you ignore them.
Do I need to pay taxes if I’m an expat and I’ve been living abroad all year? If you
are a US citizen you are taxed on worldwide income. The fact that you are living overseas does
open up the opportunity for a reduction in earned income but doesn’t impact your capital gains
requirements. The foreign exchanges could trigger a FinCen 114 and FABR reporting requirement
which can have some pretty heavy fines on them.
Do I need to report my cryptocurrency to FinCEN? An FBAR must be filed if the
aggregate balance in all covered foreign accounts exceeds $10,000. While there has been some
unofficial guidance indicating that virtual currencies will not be subject to FBAR reporting for the
current tax year, the penalties for even accidental non-compliance are extremely high. As a result,
many investors prefer to err on the side of caution.


C r y p t o t a x p r e p . c o m U . S . C r y p t o T a x P r e p G u i d e

Join our Facebook conversation: https://www.facebook.com/groups/cryptotaxsupport/ 10

CRYPTO GIFTS
How does the IRS treat charitable cryptocurrency gifts? If you give to a qualified
charity, the IRS allows you to deduct the amount from your income tax. This is true whether you
give cash or property, which is deducted at the full fair market value of the asset at the time. So,
for example, if you buy a car for $15,000 and drive it for several years until it depreciates to $1,000
before giving it away to charity, you can only deduct $1,000 from your federal income taxes.
Since the IRS treats cryptocurrencies as property, you are generally allowed to deduct the full fair
market value of your donation to a 501(c)(3)-certified charity. So, if you bought a Bitcoin when the
price was $500 and then donated it to charity when it is worth $15,000, you should be entitled to
a $15,000 charitable contribution deduction. Additionally, you may be able to avoid paying capital
gain tax on the $14,500 your Bitcoin appreciated in value.
Charitable giving is not only a great way to support causes important to you, it’s also a useful
way to limit your tax liability. However, any claimed deduction must comply with IRS reporting
and payment requirements. This is true regardless of whether you’ve made your donation using
traditional money or cryptocurrency.
Do the same tax benefits apply to cryptocurrency I give to family and friends?
No, giving virtual currency to friends, family, or uncertified charities will not entitle you to a tax
deduction. What’s more, if you make a gift of more than $15,000 in cryptocurrency – the annual
exclusion allowed under the 2018 tax rules - you must file a gift tax return along with your other
tax documents. However, for gifts under $15,000 in value, no additional reporting is required.

POTENTIAL PENALTIES FOR NOT
REPORTING
What happens if I don’t report my cryptocurrency transactions to the IRS? Short
answer: nothing good. Coinbase, the only cryptocurrency exchange licensed by U.S. regulatory
agencies, recently battled the IRS over tax liability involving over 14,000 user accounts. The IRS is
investigating Coinbase users for failing to report crypto-exchanges in the past few years.
Depending on the circumstances, this may result in onerous penalties and interest for those that


 C r y p t o t a x p r e p . c o m U . S . C r y p t o T a x P r e p G u i d e

Join our Facebook conversation: https://www.facebook.com/groups/cryptotaxsupport/ 11

didn’t report their transactions and profits.
The IRS is using the same aggressive strategy with Coinbase investors it used to thwart tax
evasion among Swiss banks. While Coinbase was the low-hanging fruit with respect to a federal
enforcement case, other exchanges and cryptocurrency owners definitely will be next. So, a word
to the wise: report those sales!
What if I just move or hide my assets? Will the IRS be able to find them? Moving or hiding
crypt assets is a dangerous game. While it may seem like a good idea at the time, avoiding tax
liability by pretending your wallet was lost, stolen, or hacked can expose you to legal and financial
liability in the future. The IRS has never been shy about flexing its enforcement muscle, and you
never want to find yourself on the wrong end of a federal suit.
Tax evasion is never ok, but smart tax planning is a good way to avoid excessive payments to the
IRS. The skilled cryptocurrency accountants at Happy Tax can get you the tax advice and planning
you need to minimize tax exposure on your virtual currency assets.
What happened with Coinbase and the IRS this year? The IRS recently filed suit in
federal court seeking retroactive tax assessments against millions of virtual currency holders. In
the suit, the agency reported that it received only about 800 returns reporting Bitcoin-related gains
or losses in 2015. Given that Coinbase currently has about 6 million active users, the IRS has
argued that most cryptocurrency holders are under-reporting their investment income.
Apparently, U.S. Federal Judge Jacqueline Scott Corley agrees; she ordered Coinbase – the largest
Bitcoin exchange in the United States – to hand over information on over 14,000 user accounts to
the IRS. Specifically, Coinbase must disclose the name, date of birth, address, and taxpayer ID of
these customers, most of whom were the highest-volume traders between 2013 and 2015. These
14,000 account holders can now expect an IRS enforcement action any day now, including fees and
penalties for failing to properly report their cryptocurrency income in the past.


C r y p t o t a x p r e p . c o m U . S . C r y p t o T a x P r e p G u i d e

Join our Facebook conversation: https://www.facebook.com/groups/cryptotaxsupport/ 12

RECORD KEEPING
What is the best way to keep crypto records for tax purposes? Responsible
recordkeeping is critical when it comes to reporting your cryptocurrency income, particularly as
the IRS is ramping up enforcement against many Bitcoin users.
Unlike most brokered securities, blockchain-based currencies don’t keep information that is
automatically recorded and reported to the IRS. So good recordkeeping is the responsibility of
you and your accountant. Cryptocurrency users should keep backup copies of all of their digital
transactions.
Having an accountant keep all of your records can give you peace of mind during an otherwise
stressful tax season. The CPAs at Happy Tax are specially trained to handle cryptocurrency on your
tax return, and they can advise you on what you’ll need to document your claims. With the help of
the skilled professionals at Happy Tax , you won’t have to worry about what you’ll need come tax
time.
What sort of paperwork and records does the IRS require for cryptocurrency
transactions? You don’t have to report when you make your initial actual purchase, but you
should keep good records of how much you paid and how much it sold for. You then report the sale
in the appropriate year’s tax return.
STAYING INFORMED
What is the best way to keep up with cryptocurrency tax laws? The IRS is creating
new tax rules about Bitcoin and virtual currency every day. A cryptocurrency accountant can help
make sure you stay abreast of new tax laws.
Can I avoid paying taxes on cryptocurrency investments? Unfortunately for investors,
the IRS is ramping up its efforts to collect Bitcoin taxes. Smart investors should consult with
cryptocurrency accountants to make sure everything is above-board.
How can Happy Tax help me with taxes? What services do they provide? Happy
Tax offers tax advice and planning services specifically focused on the needs of cryptocurrency
investors. Happy Tax employs the most skilled and experienced Certified Public Accountants
(“CPA”) to prepare your tax returns in the way that minimizes the tax exposure of your virtual
currency wallet.


 C r y p t o t a x p r e p . c o m U . S . C r y p t o T a x P r e p G u i d e

Join our Facebook conversation: https://www.facebook.com/groups/cryptotaxsupport/ 13

ABOUT HAPPY TAX
As the first and only national FinTech firm to offer bitcoin and crypto tax preparation and accounting,
Happy Tax has the most experienced bitcoin and crypto tax preparation practice in the country.
Their tax returns are 100% prepared by US-based licensed Certified Public Accountants, no fly by
night tax preparers here. Clients include miners, day traders, casual investors, early adopters, and
businesses accepting bitcoin as a payment method. Happy Tax prepare taxes for clients in all 50
states.
Expert CPA Prepared Returns
Accuracy Guarantee
100% Free Audit Assistance
Security is Built In
Year Round Support

Don’t risk misfiling or overpaying on your crypto return. If you’d like our help preparing your
crypto tax returns, visit Happy Tax by clicking here or join our closed Facebook group to learn
more.

Free Anytime Tax Returns Access

If I hire Happy Tax to help me with my accounting, will I be working with a
bookkeeper or a CPA? Every Happy Tax customer works with a licensed Certified Public
Accountant, not just a bookkeeper or unlicensed tax preparer. In addition, all Happy Tax CPAs
have been trained in the rules and regulations specific to Bitcoin and other virtual currencies.