Death, Bitcoin, and Taxes – Vincent Zandri
This is going to sound like a bummer, especially coming at you during the festive holiday season. But for all you crypto nerds and Bitcoin investors out there who think you’re pulling a fast one over the US Government and the IRS by hodling and/or trading the seemingly under-the-radar decentralized digital currency in the dark, I have some sober news for you. The IRS is onto you. Or should I say, they’re onto us, and they’re planning on taking their (un)fair share of our Bitcoin whether we like or not, or whether they recognize it as a viable income stream, or not.
Here’s how the IRS views Bitcoin and all other digital currencies. They consider it property, not a currency. What this means is, for any of us who’ve owned Bitcoin for more than a year, we’re going to be subject to a 15% tax on capital gains, or what you and I perceive as profits. Considering some of us buy and sell crypto several times per day, this whole notion of keeping track of how much we owe the government (or how much it might owe us) at the end of any given day, is a daunting task to say the least.
So what’s the best way to make sure you’re keeping up with what you owe so that you can avoid a black sedan pulling up in your driveway and some poorly suited nerdy robotic still-not-over-all-the-beatings-I-took-in-high-school bureaucrat from knocking at your door? Here’s some ideas to help you keep up with the dreaded Tax Man. Forgive me, Tax Person…we live in a hyper PC culture these days, after all.
- Keep a record of every transaction and order be it a buy, a sell, or a transfer. I don’t have experience with all the trading platforms like Bitfinex and Bitmex. Not by a long shot. But I work with the more pedestrian ones like Coinbase and Robinhood. For certain these platforms keep records for you, so all you have to do is print them out at the end of the year and calculate what you owe.
- Not all transactions are considered equal. If you hold a position for say, half a day prior to dumping it, you’re only required to pay a tax rate according to your tax bracket. This is actually good news for me as a writer since my year to year income is never steady. In other words, I have years when I’m basically living just above the poverty line (living on savings, that is), as opposed to those very generous years I’m required to pay quarterly taxes (welcome to the writer’s life). However, the mean ole’ IRS doesn’t give a rats ass about positions you’ve held for more than a year. If you decide to sell them, you will be paying 15% if you make under $500K and 20% beyond that.
- Keep special track of your losses. As a Bitcoin casual investor and enthusiast, I’m not dealing with big numbers here. But even if the amount of Bitcoin I own pales compared to Elon Musk’s stash, we both need to follow the same strategy at the end of the year. So what if he employs a team of accountants and I go to H & R Block? Try to offset your gains with as many loses as possible. Which leads me too…
- Keep up with your tax payments even before you receive a bill. Get ahead of the game by paying a certain amount forward to the Federal Government far ahead of the deadline. This will accomplish two things. It also keep you off their radar and it will prevent you from filing costly extensions. Naturally, investing in Roth IRAs or other tax saving products also helps a bunch. For writers like myself, I keep a detailed record of everything I spend, from toilet paper to breakfast cereal, by keeping a copy of every single receipt. Don’t take my word for it. My late ex-father in law, who was the New York State Tax Commissioner, once pulled me aside and said, “You didn’t hear this from me, but deduct everything. Just make sure you have a receipt for it.” Thanks Pop. Not everything is deductible naturally, but it’s best to play it safe when it comes to the IRS. If I should happen to get audited, I have the backup I need for every deductible I’ve claimed, and then some. And just imagine the expression on nerdy Tax Man’s face when you dump that pile of receipts in his lap (Crap, Tax Person…I just can’t get used to the PC culture).
- Maintain a separate bank account just for your taxes. If you take a crypto profit of say, $100, get in the habit of automatically banking one-quarter of it. At the end of the year, this will be the account you tap into to pay Uncle Sam. Chances are you won’t have to use all of it.
Obviously this is by no means an exhaustive list. I keep repeating this like a broken record because it’s the truth, people: I’m not a financial advisor, nor am I an analyst. I’m just a big believer in the future of digital currency. Apparently, so is the US Gov, or digital currencies wouldn’t suddenly be showing up on their radar. Just make sure to do your own research on the matter.
The government might be a slow, bloated, and inefficient money suck, but it’s not dumb by any means. It sees the direction Bitcoin is going and like a perpetually starving, scavenging, hairy beasts of prey, it has its good eye on the golden digital asset. Again, this not to sound like a bummer around the festive Holiday Season. But life is unpredictable at best, and terribly catastrophic at worst. One day you’re planning that Sandals all-inclusive vacation and the next, you’re hooked up to a dialysis machine. It’s our job to get ahead of anything that might mess up our plans or our bank accounts. So plan ahead because nothing in life is ever certain. In the final analysis, all we can be sure of is this: death, Bitcoin, and taxes.