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What to Do With Your Crypto 1099

July 18, 2020 No Comments
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For those trading in cryptocurrencies, crypto trading platforms are required to provide you with a form 1099 for use on your taxes. When doing so, the IRS is also notified of the information contained on the tax form. And although you will receive either a form 1099-K or a 1099-B, it is not always clear what the information is saying. For example, a Form 1099-K will provide you with a list of cryptocurrency transactions and sales, but it will not tell you what your tax liability for those transactions is. Form 1099-B does provide more information, including your cost-basis, but many companies have not yet transitioned to the more descriptive form, and instead rely on the old 1099-K, which for many purposes is useless without a working knowledge of capital gains. You can find more information on the differences between Forms 1099-K and 1099-B, here.

So what exactly do you do once you’ve received one of these crypto 1099 forms?

What is a Cost Basis?

The term basis, as used in the Internal Revenue Code, refers to a person’s initial investment in a piece of property. For example, if you purchase something for $10, then your cost basis is $10. If you then sell it for $12, your cost basis is still $10, but your gain on the sale is $2. You are required to report and pay tax on the $2 gain, but not on the original $10 that you spent on the item. This holds true with your cryptocurrency holdings, though it can become much more complex as you likely hold more than $10 in crypto, and your holdings are likely diversified among different types of cryptocurrencies, which decrease and increase in value regularly.

The relevant governing statute for determining one’s basis, as well as gains or losses, can be found in IRC §1012. For the purposes of your cryptocurrency tax liability, you will likely not need to delve into the complexities of the Internal Revenue Code, which, unsurprisingly, is not very helpful to anyone who is not a tax attorney. You can find more information on how to determine your cost basis, here.

What Do I Do With My 1099?

As stated above, a crypto 1099 often comes in one of two forms: 1099-K or 1099-B, and understanding the information on those forms can save a lot of tax-related anxiety. Many cryptocurrency investors panic on receipt of a 1099-K form, as it only shows a list of crypto transactions and not a person’s actual tax liability. In order to determine your tax liability, we will need to refer back to the term “cost basis.” You can find more information on how to determine what is known as an adjusted basis, here.

It is always good practice to keep track of the initial purchase price of any cryptocurrency transaction you make. By doing this, you can keep track of your basis in the specific cryptocurrency holding. If you have not been keeping track, it is likely that your cryptocurrency management platform has.

In order to calculate how much you owe in taxes, all you need to do is look at the transactions listed on your Form 1099-K and subtract them from your initial cost basis of each transaction. The difference between the sale price and your cost basis is the amount realized, or what the IRS will consider your “gain.” You only need to pay taxes on realized gains, meaning if you currently hold cryptocurrency that you have not sold, you do not need to pay taxes on it until you sell it. This becomes increasingly difficult when making a lot of transactions, as each sale results in the need for a computation on gain, even if reinvested in a different cryptocurrency. This is why the Form 1099-K is helpful, as it lists all of the transactions.

For those with high volumes of transactions, it can be helpful to hire a tax attorney or CPA to help you file your taxes to ensure that you do it correctly, especially when determining the correct short-term or long-term capital gains tax, which operates differently than regular income tax.

Conclusion

Now that you have a basic understanding of what a cost basis is and what your crypto 1099 means, you can make your cryptocurrency trades with confidence, knowing that when you receive a Form 1099-K, you likely aren’t liable to pay taxes on the full amounts listed thereon, rather, you only need to pay taxes on your realized gains. And if you receive a Form 1099-B instead, your basis and gain should be clearly listed, for a much easier assessment of your tax liability.

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How to Protect Your Bitcoin Wallet

July 14, 2020 No Comments
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Bitcoin is a hot commodity lately. This cryptocurrency is usually at the top of experts’ and users’ lists of recommendations for investments in the digital world. If you’re thinking about using Bitcoin or have already started your crypto journey, there are steps you can take to secure your currency. Here’s how to protect your Bitcoin wallet.

1. Use a Hardware Wallet

There are a few types of cryptocurrency wallets. Hard wallets connect to the internet for you to access at any time. This constant internet connectivity comes with certain cyber risks, though. If you want more protection, use a hardware wallet.

Hardware wallets are “cold,” meaning they do not connect to the internet, but you can still receive funds at any time. The disconnect makes it harder for cybercriminals to hack or breach your Bitcoin. Trezor and Ledger offer various hardware wallets that store your currency in an external, USB-like device.

2. Keep Your Private Key Offline

When you use a hardware wallet, it doesn’t actually store all your cryptocurrency. Instead, it stores a private key. This private key corresponds to a public key that includes certain amounts of Bitcoins, giving you the correct balance.

You must keep this private key secure. You can keep it offline by writing it down on a piece of paper and storing it in an emergency disaster kit that only you have access to. The more secure and offline it is, the less you have to worry about it.

3. Encrypt Your Wallet

Encrypting your wallet is a helpful step to take. You can start simple with two-factor authentication and go from there. Any form of encryption will help. Two-factor authentication helps with verifying your identity in two ways so that cybercriminals have a harder time breaching your wallet. You can also include encryption software if you want extra protection for your Bitcoin.

4. Keep Your Currency in Multiple Places

Don’t put all your eggs in one basket. The phrase rings true for cryptocurrency. If you have all your digital currency in one wallet, you have a higher chance of losing more. If you place your funds in different wallets, though, you have a better chance of protecting your assets. When saving, especially, you’ll want to keep your Bitcoin safe however you can.

5. Enact Smaller Transactions

If you’re a big Bitcoin spender, you might want to step back. High-value transactions and trades can draw attention from cybercriminals. If they see that you have assets to spend, they may be more likely to target your funds. Of course, you should spend your cryptocurrency however you’d like. Just keep in mind that you’ll need more protection.

>> Bitcoin Halving: How the Miners are Faring So Far

6. Use a Secure Internet Connection

Using the right internet connection is an easy way to protect your Bitcoin wallet. Of course, your home internet connection is likely a safe option since it’s secure and isolated. However, you should keep in mind that public internet connections can be risky.

Public Wi-Fi isn’t always secure, and since many people use it, cybercriminals may have an easier time accessing your wallet. When on public Wi-Fi, it’s best to not have an active wallet. If you do make transactions, strongly consider using a reputable, logless, paid VPN service.

7. Keep Your Finances a Secret

Be cautious about who you share your Bitcoin status and private key with. You’ll likely only want to keep those numbers to yourself unless you have a partner you’re willing to share them with. Otherwise, the fewer people who know, the better. Think of cryptocurrency as a real bank account. You don’t want people knowing your PIN number or account status—and your private key is the same.

8. Use Antivirus Software

Viruses are a digital plague in their own way. Cybercriminals use them to steal information and finances from vulnerable accounts. Antivirus software can help, though. Since cyberattacks are frequent and often come in the form of viruses and malware, you’ll want protection. With the most up-to-date features, antivirus software can do just that.

9. Watch Out for Phishing

Like viruses and malware, phishing is another form of cyber scamming. Certain criminals use emails and links to scam users into giving up private information about their wallets. Sometimes, phishing scams can link to viruses and malware, too. Watch out for suspicious content—it’s better to be safe than sorry.

10. Double-Check the Recipient

As you carry out your transactions, make sure you’re sending your Bitcoin to the right person. Scammers may try to skew transactions or trick you into giving your money elsewhere. You can get software or programs to help detect errors, as well. Be sure to vet your transactions and partners thoroughly before any money changes “hands.” Sometimes, it can be hard to recover your Bitcoin currency.

11. Back Up Your Wallet

Last but certainly not least, you’ll want to back up your wallet. A backup never hurts and always comes in handy if you need it. There are different ways to back up your wallet, so choose the one that works best for you. Then, you have what you need to fully protect your Bitcoin wallet if something goes wrong.

A Safe Crypto World

As cryptocurrency grows in popularity, you can expect some changes to come about. Keep an eye on the security trends and follow the best practices as they emerge. Staying ahead of the curve will bring you the best Bitcoin protection to stay safe in the cyber world.

This article was curated through CryptoCurrencyNews’ Contributor Program. If you would like to write for us, send us your submission!

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