Cryptocurrency and Taxes

Are you investing in the cryptocurrency market? Last tax year, did you sell some Bitcoin or other type of cryptocurrency? If so, you treat the investment the same as capital assets, similar to a stock or bond. Any gains or losses are taken against the market value of the cryptocurrency when you first acquired it. The value when you received the cryptocurrency is considered your basis.

Currency held for longer than one year qualifies as long-term capital gains, which are subject to rates generally ranging from 0, 15, or 20 percent. Typically, short-term gains from cryptocurrency that’s in your possession for less than a year is taxed as ordinary income.

Like stock market investments, losses can offset capital gains in certain circumstances. Losses that don’t offset can be deducted up to a maximum of $3,000, from other income sources. Losses can even be carried over into future tax years.

Complete Form 8949 to calculate the amount of gains or losses, which are then reported on Schedule D along with capital gains received from non-cryptocurrency investments.

If you purchased a product or other service with Bitcoins or any other cryptocurrency, there may be some tax implications. For example: You bought Bitcoins in late 2013 at $1,000 market value, then used that investment to buy a car at $20,000, you’d have a long-term capital gain to claim of $19,000. Similarly, if you suffer a loss when using cryptocurrency to buy product, you’ll need to report that on your tax form.

What is a 529 Plan?

A 529 plan is maintained by the state to help residents save for college. You aren’t eligible to deduct contributions made to a 529 plan, but your contributions will increase tax-free for as long as it remains saved in the plan. Even if you use the money for qualified educational expenses, earnings continue to be tax-free. When you’re ready for distributions, reporting the amounts are important when you file your tax return.

Forms for 529 Plan

Taking distributions from your 529 plan will generate a Form 1099-Q from your financial institution that handles your plan. This form documents how much you received from your plan, along with how much of that amount was generated from earnings. All distributions are prorated between contributions and earnings, in that the percentage of contributions you added to your plan determines the portion of your distribution that is from those contributions. That means that a 529 plan with $8500 in contributions that generates $1500 worth of earnings will result in 85% of your distributions coming from contributions, and 15 percent as earnings.

Qualified Distributions

You aren’t required to report distributions from a 529 plan as long as it is considered a qualified distribution. Fully qualified distributions are used entirely for expenses such as tuition, fees, books, supplies, and room and board for students enrolled at least half-time. Qualified distributions don’t have to be reported on any tax forms, and you aren’t required to file a form to prove your qualified expenses.

Non-Qualified Distributions

At tax time, you are required to report any distributions that aren’t used to pay for qualified expenses. These distributions are treated as taxable income. If your 529 Plan has 85% contributions and 15% earnings as stated above, and you receive a non-qualified distribution of $1,000 you’ll be taxed on 15% of that $1,000- $150- as it is considered income. If half of the distribution is used towards qualified expenses, then the portion considered earnings is halved as well, meaning only $75 is taxed. On your Form 1040, report the income on line 21.

Withdrawal Penalties

There is a ten percent early withdrawal penalty assessed to taxable earnings on non-qualified distributions. There are a few exceptions to this penalty, including students who attend U.S. military academy, becomes permanently disabled, or receives a scholarship that covers expenses that would be considered qualified under the 529 plan. You can calculate the penalty using Part II of the Form 5329, even if you are trying to claim an exception. You’ll report penalty amount on your Form 1040, line 58.

Real Estate Sales

At tax time, you have to be cognizant of any sales of houses or other real estate that you made during the past year, as they can have tax implications. You’ll need to report the sale of your home or other structures, including land (with added improvements or not) and interest in condos and cooperative housing projects. Most real estate sales are included, though if you sold a mobile home and it wasn’t situated on a permanent foundation, the sale is exempt.

Form 1099-S

Real estate sales are reported on a Form 1099-S. After the closing of the sale, the agent will file a 1099-S with the IRS. If you did not use an agent, your mortgage lender, broker, or the first person listed on the ownership transfer documents is responsible for filing the 1099. The Form 1099-S reports all those involved in the sale and the proceeds, including who received the money as a result of the sale.

Exclusions

If you sold your primary residence which you both owned and lived in for at least two of the five years prior to the sale, you won’t have to include any profit or gain from the sale when you calculate your taxable income. The exclusion amount is limited at $250,000 for single filers, and up to $500,000 for married filing jointly. The gain exclusion has to be on only one house and not on rental property, however the exclusion applies to individual homes and condos and co-ops.

Other Exemptions

Military servicemembers, disabled homeowners, or those who had a home destroyed by a natural disaster or accidental cause are subject to special exemptions. Form 8949 will help determine which exemptions apply and will calculate whether the transaction is a gain or a loss. Gains above the exemption threshold will be taxed, but losses can’t be deducted. If you financed the sale, you’ll need to report principal and interest payments.

Capital Gains

If you have a gain to report, you’ll have to complete a Form 8949, documenting the transaction along with a Schedule D to calculate the tax on capital gains. Whether the gain is considered long-term or short-term depends on how long you owned the original property for. The exemption limits for gains is $250,000 single and $500,000 married, as any amount above this will need to be reported on Line 13 on the Form 1040.

What is a Form 1099-A?

A homeowner who has a home in foreclosure can expect to receive a Form 1099-A from the lender. This form reports all the necessary information you’ll need to file your tax return in relation to your home foreclosure.

Capital Gains

In the eyes of the IRS, a foreclosure is the same as if you sold your property. That means you’ll either take on a capital gain or loss, although there isn’t a stated “selling price” in these circumstances. You’ll require information from your 1099-A at this point.

Important Information

The sale date and price of any foreclosed property is listed on a Form 1099-A. To accurately report the “sale” to the IRS, you’ll need to use the fair market value of the property or the balance of the loan that’s still outstanding. Box 2 will state the outstanding loan principal while Box 4 will report the fair market value of the property.

Box 1 details the date of the foreclosure, which is used as the “sale date” of the property, since the property was considered disposed of.

You should be aware whether or not your loan was considered recourse or non-recourse loan. If Box 5 is checked “yes”, then the loan was likely a recourse loan. The question related to Box 5 is: “Was borrower personally liable for repayment of the debt?”

Loss or Gain

You have to determine if the foreclosure results in a capital gain or loss. You’re not allowed by the IRS to claim capital losses on personal residences, and you need to report gains on a Schedule D. Foreclosures can result in a capital gain, though gains can typically be offset by the capital gain exclusion given to main homes. In many cases, foreclosures don’t acquire any capital gains tax, however you have to report the information on your 1099-A.

Reporting Foreclosures

If the foreclosed property was a personal residence, you’ll have to file a Schedule D with your taxes. The date of foreclosure in Box 1 is your date of sale, then you’ll need the information in either Box 2 or Box 4 as the selling price.

Calculating a Gain

A capital gain on a foreclosure is not simply the difference between Box 2 and Box 4. You’ll need to compare the sale price to your cost basis, the actual purchase price of the property, to calculate a gain. The purchase price is found on the closing statements you received when you bought the home. Any difference between the selling price and the purchase price is considered a gain, reported on Schedule D and line 13 on your Form 1040.

Form 5498

Saving for retirement with an IRA or other tax-advantaged account will generate a Form 5498 from your financial institution at the beginning of tax time. Your financial institution also sends the IRS a copy of the form, which documents how much you contributed to your IRA during the year.

Information Reported

The Form 5498 reports:

  • Contributions made to your IRA, HSA, and ESA plans
  • The fair market value of the account as of December 31st of the tax year.
  • If the account holder is required to take minimum distributions

You will receive a Form 5498 for every retirement account type you own: traditional IRA, Roth IRA, SEP IRA, and more, from each institution where they are held.

There are three different types of Form 5498, depending on the information being reported:

  1. Form 5498, IRA Contribution Information, documents individual retirement accounts like traditional IRAS, Roth IRAs, SEP IRAs, and SIMPLE IRA plans.
  2. Form 5498-SA, documents health savings accounts (HSAs) information
  3. Form 5498-ESA reports Coverdell Education Savings Accounts

Including on Your Tax Return

Contributions to a traditional IRA are reported in Box 1 of Form 5498. Line 32 of your Form 1040 will report deductible IRA contributions. Nondeductible IRA contributions go on for 8606, line 1. The amount in Box 1 of Form 5498 include contributions designated for the previous tax year and made to traditional IRA plan.

You won’t find Roth IRA contributions reported on your tax return, but box 10 of the Form 5498 does show the Roth IRA contributions you made designated for the previous tax year.

Self-employed individuals will notice SEP and SIMPLE IRA contributions reported on line 28 of the 1040. If these types of contributions are made by an employer, they won’t be reported on the tax return, but will be shown on the employee’s W-2 in box 12. Code F indicates a SEP IRA, while Code S is a SIMPLE IRA. These amounts are representative of contributions made during the calendar year instead of the designated tax year, like a traditional or Roth IRA.

Rollover contributions are reported in Form 5498 in Box 2. If you made any direct rollovers, it should match with what was reported on your Form 1099-R plus indirect rollover amounts.

Box 4 reports Roth IRA conversions. This box should match with what is reported on the Form 1099-R for Roth IRA contributions, along with lines 8,16, or 21 on the Form 8606.

Health savings account contributions are listed in box 2 of Form 5498-SA. These contributions are inclusive of the entire tax year, including those you made and those your employer made. Employer contributions are also found on your W-2 in box 12 under code W. Contributions you made are reported on line 25 of your 1040.

Form 1099-B: Investment Securities

You’ll receive a Form 1099-B from your broker whenever you sell investment securities. Form 1099-B lists the pertinent information about your sales, including date, description and proceeds, and if known, your cost basis. Investment gains and losses affect your taxes, so you’ll have to report all the required information about your investments when you file.

Form 1099-B

Investment securities include stocks, bonds, mutual funds, and others, and the sale of these will generate a 1099-B at the end of the year. Every sale gets its own 1099-B. If you make a variety of sales at a single institution, you’ll get a consolidated 1099-B with all your sales. For your taxes, you’ll need the amount you paid originally for the investment along with the proceeds you made from the sales. To record your transactions correctly, the 1099-B includes your institutions federal identification number, your tax ID number, and the security symbol and number of shares if it applies.

Form 8949

You need to transfer the information from your 1099-B to a Form 8949. Form 8949 is used to document sales and dispositions of capital assets, including stocks, bonds, and mutual funds. You’ll be required to divide your trades into long-term and short term. Short-term are held for less than one year, while any assets over a year in ownership are known as long-term trades. On the Form 8949, you’ll record a description of the asset, the date originally purchased and sold, cost basis, and proceeds from the sale. The final column is used to tally your gain or loss.

Schedule D

Once you’ve transferred the information from the 1099-B, you’ll be able to determine your initial capital gains or losses. That information is then recorded on a Schedule D, which will calculate your final loss or gain in accordance with other factors. So, if you have a carry-over loss from another tax year, you’d enter it on the Schedule D, and it will affect your total gain or loss as originally stated on the Form 8949. You’ll need to input capital gains distributions on the Schedule D as well. Simply following the instructions as per the Schedule D will allow you to calculate the appropriate tax rate applicable to your gains prior to transferring it to your Form 1040.

Taxation

Short term gains from your 1099-B will be included as regular income on your tax return. You’ll pay your taxes on those gains as if they were regular income. Long-term gains are generally subject to a lower tax rate, sometimes as low as zero percent. Losses can reduce your gains, decreasing ordinary income by up to $3,000 per year. The IRS knows if you don’t accurately report the information from your 1099-B, as your financial institution sends a copy to the government as well.

Different Types of 1099 Forms

There are many different Form-1099s that you may encounter when tax season rolls around. Some of the most common include:

1099-A: If your mortgage lender cancels some or all your mortgage, or your home was sold in a short sale, you’ll likely receive a 1099-A. Because the IRS considers canceled debt to be equivalent to income, it becomes taxable.

1099-B: For income related to the sale of several different types of securities.

1099-C: Convinced a lender to settle on any amount you owe for less than the original principal? That’s great, however you’re still responsible. The IRS will consider the forgiven amount to be taxable income, as reported on the 1099-C.

1099-DIV: Any dividends that you have received are reported on this version of the form. Dividends from a shared credit union account are considered interest and they appear on the 1099-INT.

1099-G: Money received from the state, local, or federal government is reported on this form. This can be a tax refund, credit or offset. Those who received unemployment compensation will have their income reported on a 1099-G as well.

1099-INT: Earnings of over $10 in interest from a bank, brokerage, or financial institution will grant you the opportunity to receive a 1099-INT.

1099-MISC: Income that doesn’t specifically fit into any other 1099 form can be recorded on this one. Any prizes or awards are considered 1099-MISC income.

1099-R: Distributions from pensions, retirements, profit shares, IRAs, or annuities are reported on this form. Some loans from retirement plans are considered to be distributions, and therefore reported on this form. Payments for total and permanent disability payment under life insurance will grant you one of these 1099s as well.

Is This Payment Tax-Free? It Depends

Certain payments, depending on the circumstances, may be tax-free, despite other similar payments resulting in being taxed. The following three situations require special care to determine if the payment is tax-free.

  1. Legal Settlements: To determine if your court settlement should be taxed, you need to consider the reason the settlement was granted, and if it serves as a replacement for another item. This means punitive damages are always taxed, even if they are connected to a personal injury settlement. Awards for emotional distress and anguish as a result of a personal injury or sickness case are generally non-taxed.
  2. Social Security: If your only source of income is Social Security payments, then it’s likely tax-free. However, if you have income from other sources, like part-time employment, taxable pension or earnings from investments, you may be required to pay taxes on up to 85% of your Social Security benefits, taxed at your typical federal tax rate.
  3. Sale of Your Home: If you’ve sold your home and made a profit, it’s likely tax-free, as long as the proceeds are below $250,000 for a single taxpayer ($500,000 for married couples filing jointly). Any amount exceeding these thresholds will be taxed by the IRS, generally at a lower rate subject to long-term capital gains.

It’s important to evaluate the situation carefully, as your personal circumstances can affect whether or not you have to pay taxes on the specific payments, even if they are generally considered tax-free.

Eight Examples of Income Exclusion

Gross income minus any deductions is defined as taxable income according to the IRS. Gross income is determined to be “all income from whatever source derived” according to federal law.

That covers a large portion of income, including not just earned income such as your salary, but investment income and other unearned income. If you trade items or exchange instead of cash, you can be taxed on the value of the items you’ve received. The same is true for winnings, such as gambling and lottery jackpots.

Even money from illegal activities is taxed, according to the IRS. The specific language in the tax code says: “income from illegal activities…must be included in your income.” You can report this on line 21 of the Form 1040, or Schedule C or Schedule C-EZ if you’re self-employed.

Even though the IRS taxes basically everything, there is some income which is excluded from taxation.

  1. Employer-Sponsored Educational Assistance: Up to $5,250 of qualified employer provided educational assistance can be excluded from taxation.

  2. Employer Adoption Assistance: It’s not considered income if your boss helps you to cover your adoption expenses, up to $13,570 per child.

  3. Payments Made to Care for Children: Much like child support payments, which aren’t considered taxable income, payments made from the government to foster parents for the care of the children placed in their residence are often non-taxed.

  4. Workers’ Compensation: If you’ve suffered a workplace related illness or injury as stated in either federal or state compensation law, any benefits received are generally tax-exempt.

  5. Life Insurance Proceeds: As a beneficiary, if the insured person dies and money is paid to you, it is tax-free.

  6. Municipal Bond Earnings: Interest earned on state and local municipal bonds are not taxed in most cases. IF you’ve purchased the bonds in your home state, you likely won’t be taxed on the earnings at the state level either.

  7. Gifts: If you receive money or asset as a gift, you are not responsible for paying taxes on it. If federal gift tax applies, the person who gave you the present is the one who must pay.

  8. Inheritances: Federal Inheritance Tax is non-existent, so any money you’ve been left isn’t immediately taxed. However, if you’ve acquired an asset that produces income, such as stock that pays dividends, you will owe tax on the money earned.