Crypto-portfolio down? Here’s some options for your 2019 tax filing

If all you did in 2018 was hold your coins or use major exchanges like Coinbase or Gemini, then your life is pretty easy when it comes to figuring out your crypto taxes. However, for those whose year was more eventiful, the tax situation is less straightforward.

1. Lost, stolen, or hacked funds

The crypto world is still young and your experience with it may not be as smooth as you’d wish. First, it requires some tech savviness to make sure that everything is set up properly, backed up sufficiently, secured properly, etc. On top of that, many different wallets are still a work in progress when it comes to user experience.

That is why losing access to your wallets or private keys is not as uncommon as you might expect. Second, many exchanges in which you acquire and keep your coins are loosely managed. Recent loses at the Bitgrail, Cryptopia and QuadrigaCX exchanges, are just the latest examples of a problem that has plagued the crypto exchange sector from its earliest days.

If you lost access to your wallet or your coins were hacked when they were on an exchange, those might be casualty losses – but it is unlikely due to the U.S. changing its tax laws for 2018. One of these changes was to disallow casualty losses for individuals unless they occur in a federally declared disaster. In other words, if your car got stolen in 2017, you could have claimed a casualty loss as an individual. Now, in 2018, you cannot. Same thing for getting your cryptocurrency stolen from your account on an exchange. In 2017 that casualty loss would have been deductible. In 2018, it is not deductible so it will not reduce your taxes at all.

One way people are addressing this is by setting up an LLC for their cryptocurrency investing, so that in the worst case scenario of being hacked they can still get a deduction by filing as a corporation.

Alternatively they might count as capital losses which would allow you to use them to offset any gains you had and up to $3000 of income (wages, salaries, etc.). Whether this situation results in a casualty loss or a worthless security depends on the context and the cryptocurrency in question, and you should consult with a CPA, attorney, or other professional about your specific situation.

Ultimately, when it comes to creating a full picture of your 2018 crypto transactions, these will have to be recorded as well. If you just leave them out, you’ll have a gap in your transactions and it will cause the cost-basis you use for other transactions to be incorrect.

2. Exchange closed or went out of business

Due to the extended bear market, many cryptocurrency exchanges had to close up shop. Most recently, this happened to the Liqui exchange. When this happens, customers usually have a limited window of time to withdraw their coins and get all the historical transaction data they need before the website shuts down for good. If you weren’t able to grab the data in time then your situation will require some additional tax preparation work.

Rather than take the worst case scenario, in which you mark all of your coins sent to or acquired on those closed exchanges as $0 cost basis, you may have some options. For example, you could construct "synthetic trades" if you have some rough information. If you knew that you bought ABC coin on that exchange during November 2018, you could input the price at $410, the lowest price for coin ABC during the month of November. That way, you can fill in the missing cost basis while being confident that your calculations will have a stronger chance of withstanding any additional IRS scrutiny or a potential audit. Doing this correctly in a conservative manner is difficult so we recommend you work with a CPA that understands crypto, to help with filings.

3. Coins & tokens no longer tradable

2017 was the year of the ICO – a phenomenon which slowed in 2018 at the same time as many existing ICO projects saw their tokens taking major losses – many dropping over 90% as the bear market continued. This caused some exchanges to de-list such tokens in bulk because they did not have enough trading volume to justify their continued listing/support. But, these coins weren’t completely dead and therefore could not be called worthless securities from a capital loss perspective.

Furthermore, if you just held those tokens and never sold them, you cannot count them as capital losses. You must realize the loss by selling or disposing of the token in order to get tax relief. For many investors this caused a difficult quandary as they wanted to trade the tokens to trigger a loss, but there was nowhere for them to do so. Sending the crypto to a burn address or selling to a friend is likely not sufficient to pass closer inspection by the IRS. You need to actually give up control of the asset and they could argue you can always tell your friend or family member to sell it back to you. If you go the route of selling to someone you know make sure to document everything via email just in case. You either need to find an exchange to trade them on or document the sale to someone that you clearly don’t have control over, as much as possible.

Conclusion

When it comes to crypto taxes, there are numerous ‘edge’ cases that can trigger a headache. If one of these difficult situations already applies to you, you should definitely seek out a CPA who understand crypto to help.

About the author: This article is written by Zac McClure, co-founder of TokenTax. The company’s cryptocurrency tax software was the winner of the 2017 Product Hunt Hackathon, and provides a user friendly platform for filing crypto tax returns online.