Nick’s Note: We receive frequent questions from readers about the tax implications of their crypto profits. And for good reason… our subscribers are making life-changing gains in this new asset class.

With tax season upon us, we’re running an updated version of this timely essay on the subject. Please remember, we cannot give individual tax advice. That’s why we strongly encourage you to consult a qualified tax professional.

By Nick Rokke, analyst, The Palm Beach Daily

Bitcoin is up over 3,374% since Palm Beach Confidential editor Teeka Tiwari recommended it in 2016.

Dash is up 3,594% since Teeka told you about it in the Daily back in February 2017.

And the average position in the Palm Beach Confidential portfolio is up 7,394%.

No wonder we’ve received letters from readers like William N., who let us know he was up $28,000 over two weeks.

And from Robert G., who told us he made over $45,000 on his cryptocurrency investments.

We’ve received countless other emails like this from readers who’ve made a ton of money playing the profitable cryptocurrency trend (see today’s Mailbag below).

Congratulations if you had enough guts to jump into this exciting new market.

But there is a downside to all this success…

At some point, we’ll want to take profits. And that leads to a very common question…

What about taxes?

Cryptocurrencies Are Not Tax Havens

Our mission at PBD is to help you get a bit richer every day. And we recommend a number of wealth-generating ideas—from income-producing stocks to tax liens—to help you do that.

Like any other profits you make from our ideas, your gains on cryptocurrencies are subject to taxation by the IRS.

However, cryptocurrencies are so new that many people don’t know how to treat them for tax purposes.

So, we reached out to an expert in this space to explain some of the basics. In a moment, we’ll share a few tips he gave us.

But first, we need to dispel a popular misconception about cryptocurrencies.

They are not a tax haven. You can’t use them to hide income from the IRS.

In November, a federal court ordered popular bitcoin exchange Coinbase to hand over to the IRS records of users with transactions of $20,000 or more. The records include basic identifying information, records of account activity, and period statements.

Don’t try to hide your gains from the taxman. He could trace your bitcoins back to you.

If you don’t want problems with the IRS, here are some steps you can take…

(Important note: We’re not lawyers and this is not legal advice. Before taking any action, you should consult with a qualified tax professional.)

Bitcoin Is Considered Property, Not Equity

Since cryptocurrencies are a new asset class, there isn’t a lot of clear guidance on how to pay taxes on their gains. (You can read IRS guidance on the tax treatment of cryptocurrency transactions right here.)

So, I reached out to Tyson Cross.

Tyson is a tax attorney and founder of Cross Law in Reno, Nevada. He’s carved out a little niche for himself in the cryptocurrency tax space.

According to Tyson, the IRS classifies cryptocurrencies as property. That means they can qualify as capital assets—similar to real estate and stocks—for tax purposes.

He says cryptocurrency owners should keep a careful record of their gains.

Here are a few steps Tyson said you can take to make filing easier:

  • First, keep track of your cost basis.

The cost basis is how much you paid for your property. So, if you paid $1,000 for bitcoin, your cost basis is $1,000.

It’s easy to track your cost basis if you made only one purchase. But it gets confusing with multiple purchases.

One good place to calculate the cost basis of your cryptocurrencies is Bitcoin Taxes. You can download a free tax calculator from the website.

(The free version allows you to track up to 100 transactions. If you want to track more, you have to pay for the premium version.)

  • Second, when you sell any bitcoin, you will need to file a Schedule D form with the IRS. The Schedule D form is used to report capital gains and capital losses.

  • Third, you’ll also need to report every single sale on the 8949 form. That’s the form for sales and other dispositions of capital assets.

And by every single transaction, we mean every single transaction…

For example… if you use bitcoins to buy your daily cup of coffee, you need to report each and every coffee purchase. (That’s because every time you convert bitcoin into dollars to purchase something, you’re making a potential gain on the conversion.)

We recommend bitcoin as a buy-and-hold investment, not for everyday purchases. So, this shouldn’t affect most of our bitcoin investors.

Bottom line: Cross says don’t try to avoid paying taxes on cryptocurrencies just because the government can’t track a particular crypto yet. It’s possible for the IRS to go back and find all your transactions.

Cryptocurrencies are exciting, but the tax implications for this new asset class can be daunting. But don’t be intimidated and miss out on the potential life-changing gains.

Eventually, the process will get smoother.

If you have questions about the tax implications of your cryptocurrency gains, you should contact a qualified tax professional. You can also check out the Cross Law Group right here.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

P.S. There may be a way to delay paying taxes on your cryptocurrency gains this year. Since the IRS classifies cryptos as property, you can do a “like-kind exchange.” That’s when you convert one cryptocurrency into another cryptocurrency. However, you still must report all like-kind exchanges on Form 8824. And eventually, you’ll have to pay taxes when you convert the cryptocurrency into fiat money or other property.

Before you consider any action, we strongly encourage you to talk to your tax preparer. Cryptocurrencies are an emerging asset class, so there’s a lot of grey area in tax law concerning them.

MAILBAG

More readers tell us how they’ve followed Teeka Tiwari’s “scooping a little cream off the top” strategy to harvest their crypto gains…

From Stefan A.: Just to let you know, I’ve been following your advice to “scoop some cream off the top”… and I realized quite a few gains lately. Right now, my gains are at 1,962%. I’m just kind of sad that I purchased only 1,000 euros worth of your recommendations.

Cheers from Berlin, Germany.

From Ron L.: Hi Teeka… I’m responding to your request to hear back from subscribers “skimming cream off the top.”

I have two really huge gains—10,000% in ether and 26,000% in another recommendation. Wow! You guys created huge gains for me.

With a small grubstake, my crypto holdings are worth more than my stock brokerage accounts combined. And I’ve been investing in them for 30 years. You beat my 30 years of work in one year!

From Darryl S.: Before I joined Palm Beach Confidential, I had been following a couple of day trader guys… and it was very frustrating, exhausting, and my wife didn’t like that I was staying up late into the night.

I was doing OK. I converted $15,000 into $40–50K. But there was too much buying and selling going on.

Since joining your service, I’ve sold some positions (some I regret) and added an additional $3,000. I have seen my portfolio jump to $110,000… and was able to “scoop some cream off the top” to buy my dream car!

No, it is not a BMW, Mercedes, or Lamborghini… But a 1967 VW Deluxe bus!

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