Get ready to pay taxes on those crypto gains
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With all the excitement bitcoin has generated this year, a lot of new crypto investors have made nice gains — now it's times to think about the tax bill.
Why it matters: One price the industry has paid by going mainstream is greater scrutiny from revenue authorities.
Big picture: If you were in the crypto markets this year, you almost certainly made money — bitcoin, the leader, rose all year, from around $40,000 on January 1 to just under $100,000 today.
- As ever, the rest of the market generally followed.
Crypto industry tax pros Shehan Chandrasekera of CoinTracker and Tony Tuths of KPMG agree there are certain basic things every investor needs to know.
New arrivals: Your crypto exchange isn't going to give you a nice little tax form with your profits and your cost basis, like a stock brokerage does — at least not yet.
- The IRS has a schedule to get these companies there, but don't look for it to be straightforward for a couple more years.
- Startups like CoinTracker, Koinly and TokenTax have built businesses around helping you sort this out though.
⚠️ A taxable event occurs any time there's a change in state in your crypto assets. For example, if you had nothing and got something (say: an airdrop), you owe taxes, the experts say.
- If you traded DOGE for SOL, that's a taxable event. If you bought a conference ticket with bitcoin, that's taxable.
The other side: If you just bought bitcoin periodically all year without selling any, that doesn't trigger a tax event — even if its book value went up.
Zoom in: The end of the year is a good time to harvest losses to offset your gains — both in crypto or the stock market — because taking losses lowers your bill.
- Are you still holding election meme coins? Sell them before the year ends, Chandrasekera advises. BODEN isn't coming back, after all, and those losses can offset some of your dogecoin winnings.
Meanwhile, If you've had losses in other parts of your portfolio, you could trigger gains in crypto to make use of those losses.
- There's no wash sale rule in crypto (at least, not yet), points out Tuths, KPMG's partner who leads on its digital assets work. So you could sell your bitcoin today to trigger gains and still just buy it back tomorrow.
- That way, you could use 2024's losses to lower your tax bill over time, meanwhile resetting your cost basis on your bitcoin to the present.
State of play: You will need cash. Start setting some cash aside to pay your taxes. Everyone's taxes are different, but think in terms of pulling together roughly 30 to 40% of your crypto gains now, the pros advise.
What's next: For experienced investors in this space, it's also time to start straightening out the books for next year.
- The IRS has issued an edict that from 2025 forward, all crypto tax reporting needs to be on a wallet-by-wallet basis.
- The IRS will let you treat your holdings as one big mass (universal basis), as many have done, for one last year. But after Jan. 1, no longer.
The bottom line: Gains are nice but audits aren't: Get ready to back up your filings before April. It's still largely up to you. Don't expect your counterparties to tie it up in a bow for you.
- "You gotta get your records in order," KPMG's Tuths said.
