Bitcoin has been in the news quite a bit over the past year or so. Although the government does not regulate bitcoin or other cryptocurrencies, the IRS does view it as property; which means that you have to pay taxes on it (if you own any cryptocurrencies).
Whenever you buy or trade bitcoin, your taxes will be impacted.
“The key thing going forward is maintaining records, substantially similar to stock,” says Jason Tyra, a CPA in Texas who deals in cryptocurrencies. “Incomplete records might as well be no records.”
Bitcoin is the most popular cryptocurrency around today, and it is one of the oldest ones too (it hit the market in 2009). Over the course of one year, the market capitalization for bitcoin increased from around $7.16 billion in May 2016 to $27.9 billion by the summer of 2017. In 2014, the IRS issued Notice 2014-21 which established the IRS’ position on taxation of cryptocurrencies including bitcoin.
In the eyes of the IRS, they view and treat cryptocurrencies as property, not currency. According to the IRS’ guide “How bitcoins are taxed, what information is needed” and “What tax planning techniques” they found that:
- Cryptocurrencies are property (for the purpose of taxes)
- This means that you’ll have capital gain/loss when getting rid of it
- Income is still taxable even if payment is rendered in cryptocurrency
- Spending cryptocurrencies is considered two transactions in one: disposal of the currency, and spending the dollar-equivalent amount
- Business transactions done in bitcoin have to adhere to the standard rules for sales tax
What is cryptocurrency/virtual currency/bitcoin from a tax filing perspective? This is what the IRS has to say:
- “Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”
- “Virtual currency does not have legal tender status in any jurisdiction.”
- “Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as ‘convertible’ virtual currency.”
- “Bitcoin is one example of a convertible virtual currency.”
- “Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.”
Essentially, the IRS treats income or gains from the sale of a virtual currency/cryptocurrency as a capital asset, subject to short-term or long-term capital gains tax rates — if the asset is held for more than twelve months.