Crypto Taxes and Accounting

Crypto Taxes and Accounting 101: Webinar Q&A

Published
May 3, 2019
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Last month, in the final days before the tax deadline, we held two webinars on Facebook, covering the basics of reporting your cryptocurrency taxes and how to use ZenLedger to complete your tax forms. You can watch the videos on our Facebook page.

We had over 50 questions answered by our CEO Pat Larsen and our Crypto Tax Law adviser, Andrew Gordon of Gordon Law Group.

Here is the Q&A Transcript:

Customizing Transactions

Q: When something marked as Incoming do I need to always check it for a sale or self transfer?

A: It’s a good idea to double check that all of your incoming transactions are correctly labeled.

Q: For custom csv transactions: when trading coins within an exchange, which coin is the IN and which is the OUT?

A: The coin you use to buy other coins in your exchange is the “IN” coin. bought is the coin that went into the exchange

Q: Can you treat an airdrop as a zero cost basis transaction?

A: What was the Fair Market Value (FMV) at the time you received it? Some airdrops/forks have a market value when you receive them. BCH, BTCSV, ETC are some of them. You would consider the cost basis as the market value then.

Some airdrops have no liquidity or market value at the time of receipt. For these, it may be correct to consider the market value as $0.00.

Q: How do you identify a fork as opposed to a gift?

A: A gift is coin sent to you by a person or entity. Gifts are potentially non-taxable. A fork or airdrop is coin sent to you because you owned some other coin already. Forks are taxable.

Lost Coins / ICOs/ ICO Crashes

Q: What should I do about ICOs that went bust in 2018?

A: Can treat as worthless security and sell for $0

Q: If someone forget to add wallets details while filing the taxes or ICO bust then do we need to file it again?

A: How much of your transactions were left out of your filing? Technically you should always correct an error, even a small one.

Q: I sent BTC to a friend to participate in an ICO pre-sale where “bonus” coins were awarded...The custody of the Altcoin was transferred back to me and it looks like a big incoming transaction. Do I pay income on the “bonus” coins awarded? Is this income? Or do I treat the whole ICO as a trade (BTC to Altcoin) and a self transfer of custody to me, with my cost basis being my purchase price/total amount of coins received.

A: This is probably income.

FinCEN Reporting

Q: Where do I see where ZenLedger breaks down the peak holdings by exchange. I see a bar graph for 2018 but not what the max amount was in each exchange in 2018.

A: Above the bar graph, Click on Step 1  “I Agree and Continue” then on Step 2 “continue” ,then Zenledger page shows you the peak holdings by exchange.

What is Considered a Crypto Taxable Event?

Q: What if you are unable to trade one coin for another because there isn't a trading pair and if you have to sell a coin so that you can buy with dollars. Is that sell taxable?

A: Yes, the sell is taxable.

Q: I did a bunch of trades after I bought bitcoin cheap in 2017. then your program said I made a whooping sum of money after bitcoin skyrocketed and then came down in 2018. I assume I must pay a giant tax bill for money I never made?

A: Unfortunately because when you trade a new cryptocurrency for another, capital gains are calculated on each of those transactions. So even if you didn’t realize your gains by selling Bitcoin for USD, the government considers that something you need to pay capital gains taxes against.

Q: If I have 10 Ethereum tokens and I sell off 1 to take some profits, do I only have to pay tax on the one that I took out and sold or do i have to pay tax on all 10 Ethereum that I had prior to taking out 1 Ethereum to sell?

A: You will only pay taxes on the one Ethereum you sold, not the others you continue to hold.

Q: Does buying a good/service count as a sell?

A: Capital Gains are calculated on buying goods or services, just like they are when you sell a coin. So, yes, buying goods or services with crypto is treated like a sale by tax law.

Q: What if you have been buying crypto's with bitcoin's since 2016 and have never sold any of the cryptos purchased, how does that affect your taxes?

A: If you’ve never sold any of your cryptocurrencies, you’ve never realized any capital gains or losses and there are no taxes associated with holding crypto alone.

Q:  I was buying cryptos for a buddy when he was out of the country. I was sending them to his trezor. he would send me back BTC to my trezor. is that a taxable event.

A: Taxable likely, but may not have capital gain or loss. Depends on if he kept any profit.

ZenLedger vs the Competition

Q: Why is Zenledger vs Taxbit or Tokentax?

A: We’ve just launched a page that helps you understand what separates us from the competition! Check it out.

How Are Crypto Capital Gains Calculated?

Q: If I pay taxes on crypto earned, what basis do I use when I sell it?

A: The amount of income reported becomes your basis.  Should be FMV of crypto at the time of receipt.

Q: I know FIFO is recommended, but I used LIFO last year. Do I have to use LIFO, or can I convert to FIFO?

A: If you used LIFO last year, you should remain consistent this year.  Continue to use LIFO.

Q: For airdrops, can't I just use $0 cost basis?

A: Technically no. The cost basis for the airdrop should be based on the fair market price of the asset at the time that the airdrop is received.

Q: Are forks taxable, since you (the owner) took no action to receive it.

A: In the case of forks, you could receive new crypto if you hold the original that the new crypto is forked from. These are taxable events. You will have to file income tax on the currency fork you receive, and file a gain or loss when you sell the asset. Cost basis for fork will be based on the Fair Market Price of the asset on the time the fork is received. ZenLedger accepts fork reception entries through its manual entry interface and selection from list of probable forks in app’s user flow.

Q: If I loan someone $2000 in crypto and they then send me that amount back in crypto a few months later. The exchange will show that I "Bought" $2000 of crypto when I just bought to send it to someone (Andrew)

A: The loan itself is not taxable; the buying of crypto may be. If you bought it and didn't sell, then no taxable transaction to report. Except, technically you should have a loan agreement, and report any interest.

Q: I had 4 pages of 8949 and then my tax preparer had to manually enter the data in order to file electronically. How can make this easier in the future?

A: Summarize the long and short term gains/losses on your 8949 and then say “see attached statement” that can be a spreadsheet or pdf to send into the IRS.

Q: Can the entire amount of a capital loss carryover be applied to large capital gains the following year, with an additional $3,000 deducted from ordinary income? Or can only $3,000 be applied each subsequent year?

A: If you had $10,000 in tax losses this year, you could apply $3,000 to your 2018 income taxes. You would then be able carry forward $7,000 of tax loss asset ($10,000 minus $3,000 = $7,000). If in 2019 you had $20,000 of capital gains, you could use that $7,000 tax loss asset and only have to pay taxes on $13,000 of capital gains ($20,000 minus $7,000 = $13,000).

Q: Is there a minimum threshold in dollar value owned, for required filing?

A: No. If you make $0.01 in capital gains, you are required to report it.

Q: If you meet the trader requirements for an LLC, would the 20% QBI exemption be applicable?

A: Trader can potentially be a specified service business. Accountant, Lawyers, Consultants generally meet this criteria. You should consult a tax professional in setting up this entity.

Q: If you trade crypto within an LLC, what Tax Forms need to be filed?

A:Single member LLC does not deliver a tax benefit. Schedule C or Schedule D, just like if you were an individual. Partnership- 1065 partnership tax return allocates through a K1 the tax liability or benefits. Q

: What if you get a crypto via a fork. Is that a gift?

A: No, a fork is like mining or staking. You received a coin because you hold a coin.

Using ZenLedger

Q: How can I input my hardware wallet transactions in Zenledger?

A: Through CSV import OR wallet addresses

Q: How do I report fork "income"? Do we mark it as JUST self-transfer or as outgoing self transfer or incoming self-transfer?

A: ZenLedger allows you to insert Fork transactions. Please follow these steps

  1. Visit Dashboard page
  2. Click on “Import more transactions” green button
  3. Under Import transactions page. Select tab Manual Entry -> Incoming
  4. Change Select Value dropdown to Fork and input your fork transactions amount, coin and other fields.
  5. These fork incoming will be automatically used for self transfer detection if corresponding outgoing transaction is provided to ZenLedger.

Q: Where do we find the peak holding information in ZL for our tax reporting?

A: We currently only provide the peak holding required for Fbar ie for foreign exchanges. If it’s for the FBAR , they can go to Reports > FinCen 114 and FBAR

Q: I’ve been using Bitcoin Tax the last three years and want to transfer to ZL. Can I import historical info from Bitcoin Tax?

A: Currently we don’t have a method for this, but will be working on an import for 2019!

Q: How to I use ZenLedger to indicate, on my custom csv, trading coins WITHIN the same exchange, eg BTC for say DASH?

A: Let’s say, we trade out X BTC for Y DASH , So in the custom CSV , In Amount  = Y In Currency =DASHOut Amount = X Out Currency =BTCExchange = XYZ exchange

Q: Do I need to upload a CSV report from a respective exchange each time I make an crypto purchase?

A: No! That would be so much work! You can upload from your exchange on a quarterly basis, if you need to file at that frequency, or even more infrequently, if you want to wait until year end to tax loss harvest. Anytime you want to get an estimate on your capital gains or losses thus far, import your new data to ZenLedger.

Q: When I'm uploading from an exchange (to ZenLedger), I've gotten many messages that say "We found that you have 5 INCOMING transactions." What does that mean and what do I do to 'fix' it?

A: When we send out this automated email, it means that we haven’t found a matching number of ingoing and outgoing transactions. This typically means that we’re missing some of your data. Typically, this is a missed wallet address.

Q: Does the title of csv document affect the file being accepted/rejected? After uploading Bittrex custom csv I had to delete it from ZenLedger (the name of exchange which had showed up as Manual); I renamed the file and entered the name of exchange and now ZL rejects that file.

A: Often time this happens from opening a csv file in Excel. Excel adds additional formatting to a csv file in the background, which can disrupt its ability to be read by ZenLedger. We recommend NOT opening your file in Excel after it downloads, and simply uploading it directly into our system.  

Q: How does ZenLedger handle presale ICO deals? eg if I send 30 ETH, then I receive x tokens monthly for 6 months. How will Zen ledger know that the monthly deposits of tokens are part of the 30 ETH investment earlier?

A: Please create a Custom CSV that lays out this payment schedule. You would categorize each of these scheduled deposits as an ICO. But really an ICO is just a trade of ETH for Token X- so it’s just looks like several purchases of Token X with ETH over 6 months.

Q: I have purchased the program for my 2018 taxes based on recommendation from Palm Beach. I was really easy to use and was very helpful. Do I need to purchase for prior tax years? I got into cryptos in 2017.

A: The IRS does require you to report income and capital gains. You can amend your past tax returns, which is viewed favorably by the IRS. Your 2018 tax reports will show a tax basis in 2017. Amended returns do get audited as well as First-year returns. The IRS is receiving customer information from US based exchanges and blockchain analysis companies.

Wallets

Q: I'm here and have uploaded a few csv's to my account in Zenledger - also done API for Binance and Kucoin. I'm still not clear IF and WHY I need to report what's in my wallets. Neither the IRS nor FinCen reports seem to require this.

A: If you move coins from an exchange to a wallet then back to an exchange to buy or sell, it's helpful for us to see the wallet activity. Otherwise, we have to make assumptions about the cost basis for the coins.

Self transfers (we call them Internal transfers) are a nontaxable event, but it is important for the software to see these movements.

Q: How to treat interest as in Celsius, being paid in the coin you have put in the Wallet. Also, coins received from Pundi X and Ark that are said to be dividends, are they like stock dividends that are reinvested?

A: This is treated as income just like mining, staking. You are taxed with income at time of receipt and capital gains going forward until you sell the asset.

Crypto Tax Assets and Tax-Loss Harvesting

Q: I thought that crypto losses can be subtracted from other long/short term gains in other asset classes. Is this different from the $3,000 allowance on capital losses?

A: You are correct - investors can subtract losses on crypto against other gains from other assets. If you don’t have gains on your other assets, or you don’t have other investments, you can deduct up to $3000 off your income tax total. We have a blog post that shows you how to do this!

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