Tax season is here, and crypto newcomers could be in for a nasty shock. While 2017 was a golden age for Bitcoin — the price jumped from $1,000 to nearly $20,000 — buyers benefiting from the gold rush may find the taxman wrangling for a piece of pie.

The Internal Revenue Service tax returns are due on April 17, and the authorities will want to know about your tokens’ movements for the past year. Despite the rush, with $186 billion worth of Bitcoin moving over the past 30 days alone, there is little guidance on how to include these properties as part of a return.

Inverse spoke to Mario Costanz, CEO of tax filing solution Happy Tax and preparation service CryptoTaxPrep.com, to find out more.

What’s the first step for paying taxes for cryptocurrency?

Get all of your information together in one place. The Internal Revenue Service requires disclosure of all cryptocurrency transactions, including every time you traded one coin for another or liquidated your virtual currency into fiat, such as U.S. dollars or Euros. Since you file your tax returns under penalty of perjury, you are responsible for substantiating everything you disclose to the IRS.

To get all of the information you need, you can download your account history from the exchanges you’ve traded on during that calendar year. You will need documentation sufficient to show every coin you sold or traded, the time and amount of the transaction, and the purchase price, or “cost basis” of the cryptocurrency you traded. Organize the information neatly so that it can be of use as you work through your taxes.

Bitcoin
Bitcoin

Then what do you need to do?

For most traders, the next thing to do is make an appointment with a qualified accountant. Nearly all virtual currency transactions – including coin-for-coin swaps, liquidation into fiat currency, and retail purchases – are taxable events that must be reported properly on your tax returns. The sheer volume of paperwork and calculations to properly report and pay these taxes can be astronomical.

The most committed do-it-yourselfers may still insist on going at it alone this tax season. While this is not something I personally suggest, there are some helpful online tools that can really help get the deed done. Cointracking.info offers an online and mobile app that tracks your personal profits and losses. Likewise, Bitcoin.tax can help cryptocurrency investors figure out their capital gains or losses. Export your trade history from your exchange and upload it to one of these tools. From there, you’re in a good position to figure out your cryptocurrency taxes.

Are there any hidden issues you need to worry about?

The U.S. Tax Code is immense and full of potential pitfalls. One of the hidden issues that many people in the crypto community need to pay more attention to is the reporting requirements and tax liability triggered by keeping accounts on foreign exchanges. Both the IRS and the Department of Treasury impose hefty financial regulations on Americans who hold money overseas or generate income from offshore activity.

Many cryptocurrency investors are subject to the false belief that they can hide their income by keeping outside of U.S. territorial jurisdiction. These individuals often end up instead attracting even more attention from regulatory authorities.

Are the filings the same for Bitcoin and other “altcoins”?

The IRS treats all cryptocurrency as property, and all virtual currency transactions are subject to the same tax rules. Some investors are tempted to transfer their holdings to altcoins that guarantee additional privacy protections, such as Dash or Monero, thinking these are untraceable. However, the IRS has increased the enforcement resources that are committed to cryptocurrency tax evasion, so hiding virtual currency income will only become increasingly difficult. It’s best to disclose all cryptocurrency activity properly.

Have the rules changed at all over the years?

Among other changes, the tax reform passed in December 2017 changed a small tax deferment known as the like kind exemption. While some people believe that this is a change in the law, it appears the new language actually reflects a clarification of the existing tax policy.

Either way, the new law specifically limits the deferment to real estate, rather than broadly-defined similar commercial goods. Some cryptocurrency investors had applied this exemption to coin-for-coin swaps – arguing that this type of transaction qualifies as a “like kind exchange” entitled to tax deferment. They will no longer be able to do so in the future and, in all likelihood, they will be required to amend their prior years’ returns.

What can people do to better prepare for future tax years?

One of the major determinants of your cryptocurrency tax rate is how long you held on to a coin before trading it or cashing out, so you may want to reconsider your investment activity to better prepare yourself for future tax years. Your tax liability depends on your particular facts and circumstances, so be sure to discuss your tax planning options with a qualified cryptocurrency accountant.

Bitcoin over the past 30 days.
Bitcoin over the past 30 days.

What happens if you get it wrong?

There’s a reason why America has one of the highest tax compliance rates in the world. If you make taxable cryptocurrency income and don’t report it to the IRS, you could get hit with serious fees and penalties. First, you have to pay taxes on the income you failed to report, as well as any additional tax liability incurred if it bumps you into the next tax bracket or affects your deductions. Second, the IRS can impose an inaccuracy-penalty of up to 20 percent of the amount you underpaid. Plus, you will be charged with a five percent monthly late fee on the amount you owe, up to 25 percent. It’s best to take care to get your taxes right the first time.

This Q&A has been edited for brevity and clarity.