What needs to be considered in 2020?
Bitcoin and other crypto assets are still treated like “property” for tax purposes, which means that:
- selling coins or token for fiat currencies like USD or EUR,
- using them to buy goods and services or
- trading them for other crypto assets
leads to taxable capital gains or losses. Other activities in connection with cryptocurrencies like mining, staking, masternodes, lending or margin trading can also generate taxable income. That said, as every year, there are a few important things to consider in 2020.
Top 3 tips regarding cryptocurrency taxation in 2020
Tip 1: Track you tax liability
Keep track of your tax liability during the year! There are many situations that lead to taxable income without providing liquidity to cover the tax liability. For example, if you trade coins for other coins you can realize a capital gain, but you will not receive USD to cover the tax. That is why it is so important to use a trusted tax tracking application during the year, so you can track your tax liability and make sure you have enough cash to cover it.
Tip 2: Make use of tax loss harvesting
You can reduce your tax liability by realizing your book loss, which is the negative difference between the current market value of an asset and your cost basis. In order to do so, you need to sell the crypto asset for other crypto assets or fiat currencies before the end of the year. Therefore it is important to track the profitability of your portfolio and act in time.
Tip 3: Long term vs short term
If you hold an asset more than a year and realize a capital gain, you will enjoy favorable tax rates for long-term capital gains, which are 20 %, 15 % end even down to 0 %, depending on your income. On the other side, if you realize gains from assets held less than a year, they will be taxed as short term capital gains with your ordinary tax rate according to your federal tax bracket. So watch out before selling a coin or token and check the holding period. Sometimes it is better to wait a few days before selling to optimize the tax rate.
What is new in 2020?
The crypto market is volatile and changes quickly – the same applies to taxation rules. This year you should especially keep an eye on these two developments:
Development 1: De-minimis threshold
In January 2020 a new crypto tax bill called the “Virtual Currency Tax Fairness Act of 2020” has been introduced by Congresswoman Suzan Delbene and Congressman David Schweikert. The goal of the bill is to relieve the daily usage of cryptocurrencies, i.e. especially transactions that involve crypto assets as a payment method for goods and services rather than for investment purposes, from the associated declaration obligations and potential tax liability.
The bill tries to solve that issue by exempting such transactions from the capital gains tax if the recognized capital gain of the transaction would be below 200 USD. If approved, this should apply to all transaction carried out after December 31, 2019.
You can take a look at the original bill here. Of course we are going to closely monitor the further development of the new bill and adapt the CryptoTax App accordingly if required.
Development 2: Centralized & decentralized Finance (DeFi)
Lending of cryptocurrency holdings on centralized exchanges as well as decentralized financial services like MakerDAO is becoming more and more popular. This development comes along with a diversity of questions regarding the taxation of such transactions. First of all: No worries, we`ve got you covered on that. You simply import the transactions to the CryptoTax web app, mark the relevant transactions e.g. as lending, and our application will do the rest.
For those interested in finding out about the tax consequences of centralized and decentralized financial services, we have already published the most important facts on how to tax interest payments out of lending activities and margin trading. We will keep on sharing our insights and follow up on how to properly treat DeFi transactions and what are the most important things to consider from a taxation viewpoint in short time. Stay tuned!