This cryptocurrency tax mistake could cost you $250,000

Depending on how you received or disposed of your cryptocurrency, you may face different taxes.
Worst case: Failure to report your transactions can result in fines up to $250,000 and prison.
There are more than 1,500 known virtual currencies.
Before you submit your tax return to the IRS, ask yourself: What's the cost basis of your virtual currency holdings?
It could make the difference between paying the correct amount of taxes or shelling out a fine.
As Tax Day — April 17 — approaches, cryptocurrency holders ought to take a moment and review their holdings as well as all of their transactions throughout 2017, whether they sold it, bought something with it or swapped it.
The IRS recently sent out a warning to filers, reminding them that any income stemming from these transactions must be reported on their tax returns.
In the worst case, failure to properly report your virtual currency transactions may lead to fines of $250,000 and prison.

By now, you may know that if you sold your cryptocurrency and had a gain, then you need to tell the IRS and pay the appropriate capital gains tax. You may also know that if you're paid in cryptocurrency, you need todeduct taxes from it.
Here's where things get complicated: In order to calculate the taxes you owe, you need your cost basis — that is, the original value of the asset for tax purposes — and this information can be hard to find.
"There isn't any official reporting mechanism in place," said Sarah-Jane Morin, who is of counsel at Morgan Lewis. For instance, Coinbase, an exchange for cryptocurrencies, is doing some reporting, providing aForm 1099-K to some but not all customers.
"The way the IRS is looking at this: They feel like people should comply and use their best efforts to figure out cost basis," Morin said.
That means it's up to you to hunt down your cost basis. Here's how you can get started.
Be an amateur detective

If you need to hunt down the cost basis of some long-held stocks and your brokerage firm doesn't have that information, you could dig up historical prices and dividend payments to get a sense of your cost basis.
The process is less straightforward with cryptocurrency, which any investor can trade on multiple platforms: There are atleast 190 exchanges for virtual currency.
"The exchange price on Coinbase might be different from Kraken or Poloniex," said Jake Benson, founder of Libra, a software company that provides tax reporting for cryptocurrency.
"The key issue with a lot of these transactions is that it'll be better to try to do the best you can."-Sarah-Jane Morin, of counsel, Morgan Lewis
Things get trickier when you have activity in multiple places, he said.
"When you have some holdings in wallets off exchange and you transact with friends, that's where complexity occurs," Benson said.
Gifts of cryptocurrency are also reportable: In that case, you inherit the cost basis of the person who gave it to you.
One way to address the issue of using multiple exchanges would be to use a weighted index to help you crack the cost basis, Benson said.
Indeed, some providers have stepped up to offer gains and loss calculations and to chase down your cost basis, such as Bitcoin.Tax and LibraTax, a service Benson's firm provides.
Payment in bitcoin
Exchanges can give you some notion of your cost basis, but what if someone paid you in cryptocurrency or if you mined your own coins?
Mining coins adds a layer of complexity in calculating cost basis.
"Are you a passive investor who was mining virtual currency? Were you doing it as an employee? Did someone pay you to do it?" asked Morin.
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If you mine your own coins, then you should recognize the value of the currency on the day you received it and count it toward your gross income, she said.
If a third-party is paying you to mine coins, then you may be receiving payment as an independent contractor and you would be responsible for self-employment taxes.
Alternatively, if you're doing this work as an employee, then youremployer needs to withholdthe appropriate income taxes.
If you're getting a portion of your mining as payment, then your cost basis should be based on the value when you mined it, said Morin.
The smallest deals

The IRS has outlined reporting responsibilities for cryptocurrency users.
Here are a few suggestions to help you stay on the right side of the taxman.
Think beyond sales: If you bought a cup of coffee from a merchant that accepts virtual currency, you'll need to report it.

"You can get cryptocurrency as a gift or for payment," said Benson. "It's a cost basis event, and you have to manually record the fair market value you when you received it."
Track everything: Maintain records of your transactions and translate them to U.S. dollars. At least you'll be ready if the IRS comes knocking.

"When you're buying and selling coins, track the date and the amount paid," said Morin.
Don't assume you can swap cryptocurrency free of taxes: Traders have made tax-free "like-kind" exchanges of virtual currency in the past. Don't assume that the IRS will continue to allow this.

"Like-kind exchanges must be of real property, like houses and buildings — it can't be coins," said Morin. If you have swapped one virtual currency for another, you still need to report the "like-kind" exchange to the IRS and track the basis.
"The key issue with a lot of these transactions is that it'll be better to try to do the best you can," said Morin. "Do the best you can rather than avoiding it altogether."
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