A report from Reuters last week stated that an extremely low number of US citizens are reporting cryptocurrency gains on their taxes for the 2017 year. Tax filing season began January 29th and the deadline to submit 2017 tax returns is April 17th. Credit Karma, a company that offers tax preparation services, reported to Reuters that less than 100 people of the 250,000 who have filed 2017 taxes so far have reported cryptocurrency gains, representing only 0.04%. This is despite the fact that 57% of the 2000 Americans surveyed by the company claimed to have realized crypto gains in 2017.
While many Americans have not filed their taxes yet, it is clear that the majority are ignoring their crypto tax liabilities. Since about 2014, the IRS has provided guidance on the taxation of cryptocurrencies. They treat cryptocurrencies as properties, meaning any profits or losses from trading must be reported as capital gains or losses. Additionally, the IRS expects investors to report all crypto-to-crypto trades as the difference between purchase price and sale price in the equivalent fiat currency, rather than just reporting fiat-crypto transactions. This complicates the process significantly, especially for those who have executed a large number of trades. In order to accurately report taxes in this way, traders must keep an accurate record of their equivalent fiat cost basis for every trade, which is generally not reported by exchanges.
Complicating the tax preparation process even more is the fact that investors are unsure what values to use to benchmark their fiat cost basis in the first place. Many major exchanges do not offer fiat trading, so it is very unclear where to actually source the data for the cost basis of a purchase. Some investors use the Tether value of the base coin at the time of trading to calculate cost basis, while others use global averages or simply the fiat value on the exchange where the coins are ultimately sold for fiat. The latter method is probably the most accurate, but also the most complex. This method introduces a need to maintain real time data from multiple exchanges at once. This task is exceedingly difficult given the significant volatility that most cryptocurrencies experience on a daily basis.
Some speculate that the IRS intentionally drafted overly complex tax laws regarding cryptocurrency to discourage trading. This is a possibility as the regulatory environment surrounding cryptocurrencies is still in its infancy and the features and functions of various cryptocurrencies make money laundering and other financial crimes easier. At the very least, investors are encouraged to make a good faith effort in their tax filings if the volume of trades executed is too complex to find accurate historical cost basis.
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