Recap from OST LIVE with Zac McClure, Co-Founder at TokenTax — Crypto Tax Best Practices in 2019 MOTA Follow Feb 7, 2019 · 6 min read

It’s tax season in the U.S., and we’ve all been made well aware that cryptocurrencies are taxable. Exchanges such as Coinbase have released crypto tax reporting tools to help users file their gains and losses. Zac McClure, co-founder of TokenTax, joined us to provide a global perspective on crypto tax regulations as well as common practices for U.S. taxpayers. TokenTax files cryptocurrency capital gains and income taxes for clients and supports more than 30 cryptocurrency exchanges.

McClure graduated with a degree in international finance from the University of Southern California and received his MBA in finance & strategic management from the Wharton School. He began his career in investment banking as an analyst at J.P. Morgan. He later worked as a mathematics teacher in New York, teaching financial literacy to inner-city high school students.

Before co-founding TokenTax, McClure worked in impact capital a at Bain & Company. He also worked in Africa and India doing corporate and legal structuring, helping nonprofits become self-sustaining social enterprises. After attending several cryptocurrency meetups in the New York City area, McClure met Alex Miles, whom was working on a platform to help people file their crypto taxes. It started as a platform for connecting to Coinbase. McClure joined Miles in co-founding TokenTax to add functionality and democratize access to knowledge that only private wealth managers or private accountants would be aware of, such as specific-shares accounting and tax-loss harvesting. In 2017, McClure and Miles co-founded TokenTax to provide cryptocurrency tax solutions for a much lower price.

The content in this blog post is not to be taken as financial advice.

Global Perspective on Cryptocurrency

In November 2018, the financial and economic leaders of the world attended the Group of Twenty (G20) summit in Argentina. Regulation of cryptocurrencies was a focus of discussion on the international forum agenda. Part of that discussion included the classification of a cryptocurrency as either a security such as stocks, a currency such as U.S. dollars, or a commodity such as precious metals.

Unfortunately, cryptocurrency tax reporting is different in every country. Some financial regulators such as the UK’s HMSC released guidance on cryptocurrency tax reporting. In 2015, the U.S. IRS released minimal guidance, stating that “the sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.” A similar trait in most reopening techniques is the calculation of gains and losses. Common methods include FIFO, LIFO, and average cost accounting.

U.S. Regulation

U.S. securities have special taxation and registration requirements, which was a major issue with the rise of ICOs being classified as unregistered security offerings. The IRS also requires taxable cryptocurrency events to be reported. Selling crypto for fiat, trading crypto for crypto, buying or selling goods and services with crypto, mining, airdrops, and forks are just a few of those taxable events.

Cryptocurrency tax reporting involves many of the same reporting practices as property and securities. Accountants must be very proactive, conservative, and consistent in reporting because there is currently no set of rules for them to follow as there is with stocks.

3 Helpful Things to Know About Crypto & U.S. Taxes

Keep good records.

Keep a good record of all the cryptocurrency you trade, whether on exchanges, amongst friends, or spending. Every transaction matters. One of the major challenges when filing crypto taxes is having to fill an entire gap of missing data. It may be a good idea to download and save your trade data from exchanges on a monthly basis. You never know if an exchange will be inaccessible in the future. There are also exchange APIs and third-party tracking tools such as CoinTracking and BitcoinTax that can help you track your crypto. TokenTax is also currently working on its own tracking solution. If you’re missing data, McClure suggests that you make conservative synthetic trades that are as accurate as possible. This may be a very laborious and time-intensive process. Report crypto-to-crypto.

Many people may be unaware that crypto-to-crypto trades are taxable events. If you purchased Bitcoin and traded it for Ripple, it is a taxable event. This event would account for the sale of Bitcoin and the purchase of Ripple. Many U.S. residents may have received a 1099-k tax form from their cryptocurrency exchange. Some exchanges classify withdrawals as a sale, which would be a taxable events. However, if a withdrawal was initiated to transfer funds from one exchange to another, then records need to be corrected to represent a transfer rather than a sale. McClure says that a withdrawal is not a taxable event unless it was a sale or it was used to pay for something. Be sure you keep your trade records in the case of an audit. Report All Gains and Losses

In the U.S., there’s no minimum on capital gain or loss reporting. All taxable events are to be reported to the IRS, even if they are small amounts. The cost basis of every sale is used when calculating a gain or loss. In the U.S., tax form 894, schedule D, is often used as a summation of capital gains and losses in a tax report. According to McClure, in the U.K., if you have less than $11.3k in capital gains, you don’t have to report anything to the HMSC. American W2 employees have to file their own taxes. Companies in the U.K. file taxes for their employees, meaning citizens in the UK don’t usually file a tax return unless they’re self employed.

U.S. Taxable Crypto Events

There are many taxable events that require gain/loss calculations and reporting. Here are just a few taxable events that we discussed:

Selling crypto for fiat

Trading crypto for crypto

Buying goods or services with crypto

Selling goods or services for crypto

Mining, airdrops, forks

Working for cryptocurrency

Receiving crypto as a gift /giving crypto as a gift

Selling crypto for fiat, trading it for crypto, and using it to buy goods and services are three of the most common and straightforward taxable events. McClure says that gains or losses from those three events would usually be reported on on U.S. tax form 894 schedule D.

According to McClure, selling goods or services for crypto or working for cryptocurrency is usually reported as self-employment income. There are additional taxable events that may occur such as the sale of cryptocurrency originally received as income. Mining and airdrops may also fall under self employment income.

Understanding Cost Basis

Cost basis is how much you paid for a specific asset (in this case, how much you paid for a cryptocurrency). For example, let’s say, you bought 1 Bitcoin for $1,000 dollars in January 2017. Then you bought 1 Bitcoin for $10,000 in November 2018. Lastly, you sold 1 Bitcoin in December 2018 for $15,000. What is your cost basis?

It really depends which accounting method you use. If you use the first-in-first-out (FIFO) method, then you would have a cost basis of $1,000 and a capital gain of $14,000. If you use the last-in-first-out (LIFO), then your would have a cost basis of $10,000 and a capital gain of $5,000. There are additional accounting methods such as minimization accounting and average cost accounting. It is important to stay consistent with the accounting method that you choose. The accounting methods allowed depend on which country you reside in.

Coming Up Next on OST LIVE: Mike Dudas

OST’s Jason Goldberg will interview Mike Dudas on entrepreneurship, the latest in the crypto market, and crypto controversies. Dudas is the founder and CEO of The Block, an online media platform focused on crypto market information, technology, and crypto assets. Be sure to subscribe to our YouTube channel to watch live and meet community members in the live chat. You can also find OST LIVE on your favorite podcast app, including: iTunes, Alexa, Spotify, CastBox, Google Play, TuneIn, Stitcher, PodBean, Overcast, and Player FM.

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OST blockchain infrastructure empowers new economies for mainstream businesses and emerging DApps. OST leads development of the OpenST Protocol, a framework for tokenizing businesses. In September 2018 OST introduced the OpenST Mosaic Protocol for running meta-blockchains to scale Ethereum applications to billions of users. OST KIT is a full-stack suite of developer tools, APIs, and SDKs for managing blockchain economies. OST partners reach more than 300 million users. OST has offices in Berlin, New York, Hong Kong, and Pune. OST is backed by leading institutional equity investors including Tencent, Greycroft, Vectr Ventures, and 500 Startups.