Some Tax Aspects to Consider with Crypto
One of the many reasons that cryptocurrencies haven’t yet reached mainstream adoption is the lack of clear regulations regarding their taxation. Investors at the retail level don’t yet know how to track and handle their cryptocurrencies in the correct manner, and result can get messy.
There was all the trouble last year regarding crypto-for-crypto exchanges and whether that was a taxable event or not (hint: it is), and with regulators subpoenaing crypto exchanges, it is in users’ best interests to declare their earnings.
Users don’t have to report their cryptocurrency holdings unless they trigger a taxable event in the course of the year. So if you’re a HODL’er, you don’t really need to worry about this stuff. One interesting statistic has shown that of the $1.7 billion estimated to have been lost in the bear market of 2018, only half of that has been sold and turned into a “real” loss.
Taking the loss is psychologically painful, so it makes sense why not every investor has been keen to admit defeat, especially with so many news stories hyping the comeback around the corner. Additionally, the tax hassle of taking a loss and keeping track of it can be an annoyance in itself. None of this is as easy as when you take a capital loss on a stock and then buy it back after a certain time limit in order to still participate in the upside while also utilizing your capital loss in the present.
However, there are a few exceptions that can make things more complicated. For example, in the U.S., if users hold more than $10,000 in a foreign financial account, they must report these holdings in an FBAR (foreign bank account report). The reasoning behind this is clear, but it is also easy to see how users may thing that holding their cryptocurrencies in an offshore exchange could be legal, since they haven’t sold at that point in time.
Donations work to the taxpayer’s advantage, as they reduce the taxable income by the amount of fair market value (or the cost if they carried the asset for less than a year). This may be one of the better ways for users to take their capital losses from the last year, since actual deductions of capital losses are limited to $3,000 per annum, and there is no ability to carry this backward.
Realities of the Industry
The industry is currently plagued by the fact that so few people know exactly how to handle these tax aspects of their lives, because so much of the wealth management industry is normally handled by the banks. Therefore, the downside to all these investors taking custody for their own investments is that they are potentially incurring a liability.
The last thing to emphasize is even though a lot of people hate the idea of needing to pay taxes to the government, and are likely partly interested in Bitcoin or other cryptocurrencies because of the self-sovereignty it can deliver, there are risks. Tax evasion is a serious crime and a pretty dumb reason to end up in jail or paying massive fines.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
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