Bitcoin, Cryptocurrency, Virtual Currency and Taxes

Facts and information about virtual currency transactions and taxes

How is Virtual Currency Classified?

Bitcoin is the most widely circulated digital currency or e-currency as of 2018. It’s called a convertible virtual currency because it has an equivalent value in real currency. The sale or exchange of a convertible virtual currency—including its use to pay for goods or services—has tax implications.

In Internal Revenue Service Notice 2014-21, virtual currencies like Bitcoin are classified as property. The IRS is aware of the growing popularity of this medium of exchange and that it is not considered legal tender by any government. Some employees are paid with Bitcoin, more than a few retailers accept Bitcoin as payment, and others hold the e-currency as a capital asset.The IRS notice hopes to clarify how you must treat your use of this new technology. The outcome for users is not good. Here is what you need to know:

As Property

Property is subject to gains and loses. So if you use a virtual currency like Bitcoin, you must keep track of the original cost of the coin and its value when you use it. As a capital asset, like stocks or bonds, any gain or loss from the sale or exchange of the asset is taxed as a capital gain or loss. Otherwise, the investor realizes ordinary gain or loss on an exchange.

As Income

Wages paid in virtual currency are taxable to the employee, must be reported on a W-2, and are subject to employment taxes. You must convert the Bitcoin value to U.S. dollars as of the date
each payment is made and keep careful records. Income received as an independent contractor has self-employment rules applied and must follow Form 1099 reporting requirements.

Determining Value

If you purchase or sell something using a virtual currency, you need to determine the fair market value of the transaction using a valid virtual currency exchange and translating it into U.S. dollars. Short-term gain is held less than a year. Long-term gain is held more than a year.

Mining

Miners are those who receive Bitcoins and other virtual currencies by validating transactions and maintaining public Bitcoin ledgers. If you are someone who “mines” virtual currency, you create income upon receipt of the currency. This is a
taxable event. If a bitcoin miner is self-employed, his or her gross earnings minus allowable tax deductions are also subject to the self-employment tax.

Crypto Software

Look into BitcoinTaxes and CoinTracking. Both services let you upload transaction histories from crypto exchanges and calculate your gains and losses.

More info and FAQs

Virtual Currency Glossary

IRS Resources

 

Gains

Calculating your crypto taxes for gains and losses takes just three steps:

  1. Find out how much you made selling crypto.
  2. Figure out whether you have a short-term or long-term gain.
  3. Calculate your taxes. Use federal income tax brackets ordinary tax rates (for short-term gains) and capital gains tax rates (0, 15, or 20% for long-term capital gains).

Losses

Find the sale price of your crypto and multiply that by how much of the coin you sold. Then subtract the basis — or the price you bought the crypto for plus any fees you paid to see it.

If the result is a capital loss, the law allows you to use this amount to offset your taxable gains.

But $3,000 is the maximum you can deduct each year.

FAQs

If I sell my crypto for another crypto, do I pay taxes on that transaction?

  • Yes. Most tax experts believe the IRS considers a crypto-to-crypto transaction a taxable event — which means it’s subject to taxation.

    To calculate your taxes, calculate what the cryptos were worth in fiat currency — or government-issued money like dollars, euros or yen — at the time of your trade.

    Though it requires more work, the extra effort can help you keep diligent records, which may come in handy if the IRS comes knocking.

How does the IRS treat a crypto “fork”?

  • This is a question that doesn’t have a clear answer. It might make sense that the IRS would treat a “fork” — a crypto term for a split in the currency — as it would your typical stock split.

    In that case, you might not pay any taxes on the split itself. Rather, you’d pay on any gain resulting from the split when you eventually sell your shares. However, this information has yet to have a definitive answer and we suggest following the IRS’s Virtual Currency Guidance page for if or when they deliver clarification.

Do I pay taxes when I buy crypto with fiat currency?

  • No. Because you don’t realize gains when you buy crypto with fiat, you don’t have to pay taxes.

Does Coinbase report my transactions to the IRS?

  • Yes, but only if you’ve used your account for more than $20,000 in cash transactions.

    For these accounts, Coinbase files Form 1099-K — Merchant Card and Third-Party Network Payments with the IRS.

    Even if you don’t do $20,000 in transactions annually, you should report your crypto activities on your tax return. 

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