Did you sell, use, or convert crypto in 2018? If so, you may owe taxes if you’re a US taxpayer. Here’s a look at what that could mean, the steps you may have to take, what forms you’ll need, and how gains and losses may affect your taxes.
Coinbase doesn’t provide tax advice. We put this guide together for informational purposes only and it shouldn’t be considered tax advice or an individualized recommendation. Please consult a tax-planning professional regarding your personal tax circumstances.
At Coinbase, we see crypto as the foundation for tomorrow’s open financial system — but it’s also a part of today’s traditional one. To make taxes easier, the IRS has issued crypto tax guidance.
In 2017’s tax season, we received a lot of questions from crypto newbies and experienced customers alike. We get it — paying bitcoin taxes and other crypto taxes can be confusing. And while we can’t give tax advice, we want to make crypto easier to buy, use, sell, and use. This guide is our way of helping you better understand your 2018 crypto tax obligations.
There’s a lot of conflicting content out there, but make no mistake: you are required to report gains and losses on each cryptocurrency transaction or when you earn cryptocurrency, even if there is no gain or loss or the gain or loss is not material. Regardless of whether an exchange sends tax forms to you and the IRS, the IRS holds you responsible for reporting all income and transactions. Exchanges like Coinbase provide transaction history to every customer, but only customers meeting certain mandated thresholds will also receive an IRS Form 1099-K.
One quick note if you’re a non-US investor: crypto taxes are treated differently country-to-country. This guide only covers the US in 2018. Be sure to consult a local country tax advisor to confirm your tax reporting obligations.
The reason that buying and selling crypto is taxable is because the IRS identifies crypto as property, not currency. As a result, tax rules that apply to property (but not real estate tax rules) transactions, like selling collectible coins or vintage cars that can appreciate in value, also apply to bitcoin, ethereum, and other cryptocurrencies.
To no one’s surprise, the IRS isn’t kidding around. Failure to report income, including income from the sale of bitcoin, ethereum, or other crypto, could result in interest on unpaid taxes and a number of penalties. Please consult with a tax-planning professional regarding your individual reporting obligations.
With all that in mind, here’s our list of five steps you can take to help you understand if you may need to pay crypto taxes, how to determine the amount, and what forms you may need. Let’s dive in.
Even if you’re in the “Just HODL it” camp, it’s worth evaluating your crypto transactions in 2018 to determine if you may owe taxes.
In short, a lot. Even if you're in the "just HODL it" camp, it's worth evaluating your transactions. Here are some examples of taxable crypto events:
In other words, realizing the gain on your crypto property (don’t forget losses could help with your tax bill)
For example, using Bitcoin to buy a pizza
I.e. “converting” one crypto into another. Using bitcoin to buy ethereum is considered a disposition of the bitcoin, for example
Including bitcoin, ethereum classic, and more
When you’re paid in crypto by an employer, your crypto is classified as compensation and will be taxed according to your income tax bracket
Transactions must be reported at their fair market value as measured in US dollars. So if you bought a pizza with bitcoin, you would have a disposition of the bitcoin equal to the cost of the pizza (the fair market value) in dollars.
If you received free coins through an airdrop to spread awareness about a new cryptocurrency, although the IRS has not issued specific guidance on airdrops, how the cryptocurrency is used will have an impact on how it is taxed. Airdrops are like free money received in a giveaway or in a lottery winning so they should generally be taxable as ordinary income valued at the fair market value on the date of receipt.
- Lisa Greene-Lewis, CPA, TurboTax
Some non-taxable events include:
GiveCrypto.org, for example
(HODLers, anyone?) There's no gain or loss recognized if it's just held
Make sure to check the transaction records of your exchanges to confirm they’re not recorded as dispositions
Coinbase to Coinbase Pro, for example
First, you’ll need a single view of all your crypto-related transactions, each of which must be reported on your tax return.
Recipient of a Gift - If you are the lucky enough to receive cryptocurrency as a gift you would not have a taxable event until you sold the cryptocurrency. When you sell the cryptocurrency your cost basis will be the same cost as the person who gifted it to you.
Person Who Gives the Gift – If you give a gift of cryptocurrency, you can give up to $15,000 per recipient in 2018 without paying taxes. If your gift exceeds $15,000 per recipient, you are required to file a gift tax return.
Charitable Donations – If you give cryptocurrency directly to a 501 ( C ) (3) charitable organization you:
- Lisa Greene-Lewis, CPA, TurboTax
Coinbase customers can generate reports with all buys, sells, sends, and receives of all crypto associated with their Coinbase and Coinbase Pro accounts. These reports show what we think your cost basis could be for all purchases and proceeds for all sales, inclusive of Coinbase fees. One thing to remember: these reports only detail transactions associated with your Coinbase account, and will not be correct if you moved crypto from other wallets or exchanges because Coinbase doesn’t have information about your holdings prior to them moving onto the Coinbase platform. If you used other exchanges, you’ll need to download similar reports from them and reconcile.
Download your Coinbase account report
For all transactions, you need the cost basis of each transaction — the amount in dollars that you spent originally to buy it — and the amount in dollars it was worth when you sold it. This will be used to calculate your gains and losses.
Quick note on proceeds: when you see them on a 1099-K, the amount can look bigger than you expected since they take into account all the transactions you made in a year.
Now that you have a comprehensive view of your 2018 activity, you’ll need to figure out whether you incurred gains or losses on each transaction. This probably means you’ll need to review each transaction and determine the cost basis to see if it’s a loss or a gain.
Losses can be used to offset capital gains in a given tax year, plus $3,000 — this means that any losses incurred on bitcoin and other crypto may be deductible, unlike losses on your car.
This tool can help you determine a preliminary gain/loss amount for 2018 for your Coinbase activity. This tool is intended to assist you in compiling information, but it will not have information about crypto-related transactions outside of Coinbase. It's important to review and verify the information for accuracy depending on how you transacted on Coinbase. This tool shouldn’t be used as official tax documentation.
If you bought extensive amounts of cryptocurrency at different times and sold only a portion of it, you may be wondering if the ones you sold should use the costs of the first crypto you purchased, the last ones purchased, or if you should use the specific identification method. Coinbase will estimate the cost basis of your individual cryptocurrency transactions, but you will need to determine whether you chose the costs using the FIFO(First-in-First Out), LIFO(Last-in-Last-Out), or the specific identification method. Absent of IRS specific guidance on which cost method to choose, the IRS does consider cryptocurrency as property like stock and says general principles that apply to capital assets like stocks should apply to crypto transactions. If you have purchased extensive amounts of crypto and sell only a portion of the portfolio bought at various times, you should use the most conservative method, FIFO, to determine your cost basis just like with stock transactions.
- Lisa Greene-Lewis, CPA, TurboTax
We’re go-getters and DIYers, and a lot of our customers are the same, but paying bitcoin taxes and other crypto taxes is complex. So when in doubt, consult a qualified tax professional.
In plain English, Coinbase doesn’t provide tax advice, even though we want every member of the crypto community to avoid the confusion we’ve seen in the past few years. This educational guide was prepared for general informational purposes, and we hope it helps, but we just can’t replace the attention a tax professional will give your unique situation.
Although IRS has not issued specific guidance on hard forks, how cryptocurrency is used also has an impact on how it is taxed. If you received free crypto as a result of a fork, your free crypto will be treated like free money received in a giveaway so it would be taxable as ordinary income valued at the fair market value on the day it is received. The fair market value is the amount someone would pay for the cryptocurrency on the date of receipt.
- Lisa Greene-Lewis, CPA, TurboTax
Here are some forms you may want to get familiar with. Some we provide, and some you put together yourself.
Have transactions that qualify as a capital gain or loss? Those go here and can be filled out using your transaction reports from various exchanges.
Commonly referred to as just Schedule D, this is the summary of your capital gains and losses.
Only the government could come up with a tongue-twister of a name like this. Anyway, if you had more than $20,000 in gross proceeds and more than 200 transactions in 2018 on Coinbase Pro, Coinbase Prime, Coinbase Commerce, or an equivalent exchange, you should receive this form which shows all of the transactions that passed through your accounts in a given calendar year. Note that this doesn’t record your cost basis — it’s just an aggregation of all the proceeds you received from your disposition transactions. You still have to report the transactions individually to the IRS.
If you live outside the US, you’ll want to check to see if you’ve received all the forms you need to file your tax return. Just in case, make sure you have detailed transaction history reports that reflect all your purchases and sales across all exchanges you used. If necessary, you may have to contact your exchanges directly.
You’ve got your transactions, you know your gains and losses, you’ve consulted a tax-planning professional, and you have your forms ready. Pat yourself on the back: you’re probably ready to file your taxes (though it doesn’t hurt to check with the experts one last time).
Congratulations, and we hope this guide helped you out!
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If you hold a stablecoin such as USD Coin that is valued at $1, and you bought it for exactly $1, you have no gains or losses when you sell out of that stablecoin. So while technically stablecoin transactions are taxable and still reportable, there’s no gain or loss to claim.
While you’re in the process of preparing your tax forms, you’ll probably run into some (a lot) of technical terms. Here are some of the more common ones:
A capital asset is property of any kind that you own, including stocks and bonds, a home, and crypto.
Your basis is the cost, in dollars, that you actually paid for crypto when you purchased it, adjusted for any related costs.
There is no standard guidance from the IRS on how to apply your cost basis to individual sales or exchanges of bitcoin, ethereum, and other cryptocurrencies. We’ve seen these common approaches, in addition to the many others out there:
First In, First Out (FIFO) — This method assumes that the first assets you purchased are also the first assets you sold or exchanged. Your gain/loss is calculated based on the price you paid for the oldest assets in your portfolio, and the asset price at the time of sale or exchange. This is the most common approach for traditional investments.
Specific Identification (SpecID) or Last In, First Out (LIFO) — SpecID relies on investors to specifically identify to their tax professional the assets they sold or exchanged. LIFO is one programmatic strategy that assumes the last assets you purchased are the first assets you sold or exchanged. For any of these approaches, you’ll want to consult a tax professional.
For tax purposes, the fair market value of crypto is the dollar value of the crypto at the time of a transaction.
Gains are the profits you make on property. These gains are “unrealized” if they’re on paper — for example, if your bitcoin has increased in value but remains in your possession. When you sell your property and receive the cash value of that gain, though, the gains become “realized” and have tax implications.
There are plenty of questions about whether or not investors can claim a direct crypto conversion (e.g. bitcoin to ethereum) as "like-kind", avoiding taxes on those transactions. The tax laws changed beginning in 2018, and like-kind exchanges are only available to real estate transactions.
If you’ve sold a capital asset, you need to determine whether the asset was long-term or short-term. Long-term means that you held the asset for over a year before selling or disposing of it, while short term applies to assets you’ve held for less than a year. Long-term capital gains are often taxed at more favorable rates than short-term capital gains.
Losses occur when you dispose of your property for less than your cost basis. If your crypto is a capital asset under the definition above, you can use a capital loss on that asset to offset capital gains from other assets for that tax year (plus $3,000).
Ordinary assets include things like inventory and stock-in-trade (i.e. the goods and services that a business sells day in and day out to its customers), and property acquired in a trade or business. If you think you own crypto as an ordinary asset, consult a tax professional.
Generally, proceeds are the money you received when you sell your property. If you sold your crypto for dollars, the amount of money received is obvious. If you sold your crypto for a different crypto (i.e., you “converted” one crypto into another), then you must determine proceeds by reference to the dollar value of the crypto you received at the time of receipt. Gains are computed as proceeds minus your cost basis (what you paid for the original crypto).
A majority of investors own crypto as capital assets, and use “Sales and Other Dispositions of Capital Assets, Form 8949” to report all their individual crypto transactions. Here, an investor describes assets transacted, including the dates they acquired and sold it, how much they made, the cost of doing the transaction, their net gain or loss, and if it was short or long term.
This form summarizes your total short-term and long-term capital gains and losses from your Form 8949, Sales and Other Dispositions of Capital Assets.
A Form 1099-K is an informational form that reports income (but not cost basis, gains, or losses) from credit card and third-party networks. If you had sales transactions of more than $20,000 and more than 200 transactions in a calendar year on Coinbase Pro, Coinbase Prime or Coinbase Commerce, you will receive a Form 1099-K. The third-party payment settlement entity — in this case, Coinbase – is responsible for sending you a 1099-K if you meet these qualifications.
Note: Coinbase customers (who do not also use Coinbase Pro) will not receive 1099-Ks — they are not required at this time.