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FBAR, FATCA, And More: Report Your Damn Cryptocurrency Trades or Else
DISCLAIMER: None of the following is intended to be investment advice. It’s also not intended to be tax advice. Consult a licensed expert such as a CPA — don’t make any tax decisions based on this article. Also, full disclosure, any links to Coinbase and Binance, etc., include referrals. It actually benefits you to use them because we will both get an extra $10 worth of BTC for free if you deposit at least $100 to Coinbase. Thanks in advance if you follow the links when you make your accounts — and even if you don’t, I hope you find this article interesting!
The conjunction of cryptocurrency and taxes has been a vague and nebulous thing for years. In the earliest days, no one seemed to be able to be able to figure it out what kind of asset Bitcoin was supposed to be. Even today, the issue is in question — but at least some things have come into focus. Namely, the proper way to pay your crypto taxes as a trader.
For most Americans, tax season is long since over. However, if you’re like me, then you filed an extension and are just about to finish up and pay the piper. If it seems like I’m doing things at the last minute, I am. I had to work with my CPA to explain a lot of things from the technical side — CPAs tend to be smart guys but probably very few of them understand what’s going on with Bitcoin. Those of us who have been in cryptocurrency for a while tend to take it for granted, but it’s important to remember that this stuff tends to look like black magic to people who have never heard of it before.
Capital Gains and Cryptocurrency
Most people know by now that crypto trading — for the purposes of the IRS, anyway — constitutes a capital gain. A capital gain is defined as follows:
capital gain, noun: a profit from the sale of property or of an investment.
A capital gain is also a term of art when it comes to taxes. When you sell (or trade) assets like stocks, precious metals, and Bitcoin, you pay what’s known as a “capital gains tax” on any profit and you can also claim a “capital loss” on any loss.
Now, before I move on, I should reiterate that I am not a Certified Public Accountant (CPA). You should consult a CPA for details on all of this stuff before making any decisions. However, my experience with paying crypto taxes may prove useful nonetheless — and it is informed by my experience with a very skilled CPA.
So, first things first, we need to establish our cost basis. To quote investopedia:
Cost basis is the original value of an asset for tax purposes, usually the purchase price, adjusted for stock splits, dividends and return of capital distributions.
In the case of Bitcoin, this is just what you paid for your coins. However, every time you traded one cryptocurrency for another (or sold crypto for fiat) throughout a calendar year, you create what’s known as a “taxable event.” While you used to be able to get around some of this by claiming it as a like-kind exchange, this is no longer the case. Your CPA can explain all this stuff to you better than I can, but the long story short is that you need to collate the following information:
- How many coins and tokens you original bought and at what price.
- How much each crypto-to-crypto trade you made throughout the year was worth in fiat at the time of the trade.
Number two is a barrel of monkeys.
Collecting the Data
Different exchanges work differently, but more-or-less all of them should allow you to dump your trades to a CSV (comma separated values) file which a program like Excel can open. Your exchange may or may not provide you with the fiat value of the crypto-to-crypto exchange at the time of the trade. If you, for example, traded some amount of Ark for one Bitcoin, you’d need to know the average price of Bitcoin on the date of the trade.
There are various crypto tax programs out there that do this calculation for you. Unfortunately, I have not reviewed any of them yet, so I cannot yet offer any suggestions. For me, I wrote my own script. It takes a CSV file full of coin names, dates, and amounts. It then prints the USD values for those transactions using prices averaged across all major exchanges. The program is rough around the edges so I haven’t published it, but I will soon — hopefully it will be helpful. After all, if you’ve done dozens, hundreds, or even thousands of crypto-to-crypto trades, you really don’t want to have to do this by hand!
The High Rollers Table: FBAR and FATCA
Reporting your trades isn’t all you have to do if you’ve invested significant amounts of money into crypto. As you probably know, most major exchanges — especially the crypto-to-crypto exchanges — are foreign. This means that there are special reporting requirements which the IRS expects you to comply with.
If you have over $10,000 across all foreign exchanges, you must file an FBAR — and if you have over $50,000, you must file a FATCA. These forms aren’t too complicated. All you really need to know is your account number (often just use your associated email address) and the country that the exchange is based in. Binance, for instance, is currently located in Malta while Bitstamp is headquartered in the UK. Do the legwork to find this information for each exchange you’ve traded on, but be sure to have your CPA advise you (or, ideally, fill out the forms for you).
For your sake, I would strongly suggest that you not ignore these reporting requirements. The FBAR and the FATCA are serious. Not filing — or misfiling — can lead to massive penalties including jail time. It’s easy for us crypto enthusiasts to get caught up in the excitement and hype of new technology, but at the end of the day you have to do the boring paperwork.
Rendering Unto Caesar
If you’re behind on this — if you inadvertently misfiled, for example, as I’m certain many people did before they understood how crypto taxes worked — I urge you to see a CPA as soon as possible. They can help unravel any tax yarn ball, and like most things it’s best to do this sooner or later.
My overall opinion? Err on the side of caution. Very few things scare me in this world, but the IRS is one of them. The last thing I want is to be staring down some IRS guy who doesn’t know what Bitcoin is and possibly has the mistaken impression that only fraudsters use it. The bottom line is this: while we all want to claim the deductions we're entitled to, we must be equally certain that we're properly reporting our trades and income. People often think that using cryptocurrency means you can fly under the radar. It doesn’t. Pay your damn taxes and enjoy the peace of mind that comes with it. It’s just not worth the risk to do otherwise!
Before you go…
Know of any other hot-button issues with cryptocurrencies? Want me to write about them? Let me know! I love to hear feedback from people and get ideas on what cryptocurrency topics I should research. You never know, I might even write an article about your suggestion!
If you’re new to cryptocurrencies, don’t worry — it’s easy to get in on this! Here are the basic steps if you’re interested in Bitcoin or altcoins:
- Buy some Bitcoin or Ethereum from Coinbase.
- Trade them for altcoins on Binance, KuCoin, HitBTC, or Changelly. Out of these, Binance is my preferred exchange. Skip this step if you’re uninterested in altcoins, of course!
- If feasible, store your coins offline in a wallet for security purposes. Use an inexpensive Android phone with the Coinomi wallet app, or go ultra secure with a hardware wallet like the Ledger Nano S or Trezor.
If you’re looking for a more lengthy guide to purchasing coins from start to finish, just take a look at my page — I’ve written a lot about this! Any of my instructional altcoin articles (such as this one) will first explain in detail how to get Bitcoin if that’s all you want.
Come back soon because more content like this is always coming! If my work helped you or gave you something to think about, share it with others:
Sharing helps more people find my articles, and I’d love to be able to assist as many people as possible with cryptocurrencies. Also, if you have any ideas for future articles or specific questions, I’d love to hear them. Comments section coming soon! One last thing: if you’d like to chat with me in real time, check out my Patreon - I am running a public Discord for the discussion of cryptocurrency, and if you subscribe to my Patreon you can get a special role there!
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