Tax Your Bitcoin Properly – A Primer

Taxes are confusing. We have worked to simplify the process!

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Some History About Bitcoin And Taxes

Bitcoin Advice has been involved in Bitcoin for 7 years now. In the first years, Bitcoin users were gleaming with enthusiasm for how Bitcoin might change the world and were not so much mindful of how governments might try to exert their influence and control over Bitcoin’s community. Bitcoin and its users mainly operated in a gray area for a long period of time. Only just recently was the first US securities fraud conviction of a Ponzi scheme operator using Bitcoin to defraud individual investors. Although staying inside the Bitcoin ecosystem by only transacting Bitcoins can safeguard you from illegal seizures by banks, once you exit Bitcoin by transacting your Bitcoins for other currencies you can expose yourself to monetary seizure and further tax liabilities.

…a United States judge has ruled Bitcoin as money, while another judge has ruled it is not money. A judge in California has ruled that Bitcoin is property, and not currency

In recent years, government regulations have been passed which require personally identifying information in order to exchange Bitcoins. Government agencies like the United States Internal Revenue Service have also recently given answers to the Bitcoin taxation question. Here are some example questions and answers from the IRS:

Q–1: How is virtual currency treated for federal tax purposes?

A–1: For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.

Q–2: Is virtual currency treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws?

A–2: No. Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.

Q–6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?

A–6: Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency. See Publication 544, Sales and Other Dispositions of Assets, for information about the tax treatment of sales and exchanges, such as whether a loss is deductible.

Naturally, taxes can be confusing. Especially so when a seemingly undefinable (in a regulatory and taxation sense) concept such as Bitcoin is involved. In fact, a United States judge has ruled Bitcoin as money, while another judge has ruled it is not money. A judge in California has ruled that Bitcoin is property, and not currency. The situation is beyond confusing. Thankfully, there are businesses and individuals who have clarified the process of figuring out one’s Bitcoin taxes.

Accounting For Bitcoin On Your Taxes does a great job simplifying the taxation process:

Simply import details of any Bitcoins or alt-coins you have bought or sold from one of our supported trading exchanges, add any spending or donations you might have made from your wallets, any mined coins or income you have received, and we’ll work your tax position for you.

Once you have imported your details, will generate for you a:

  • “Capital Gains Report detailing every transaction’s cost basis, sale proceeds and gain”
  • “Income Report with all the calculated mined values”
  • “Donation Report with cost basis information for gifts and tips”
  • “Closing Report with your net profit and loss and cost basis going forward”

You can even import these documents into tax software like TurboTax® and TaxACT®. 

Intuit Quickbooks, the popular accounting software, now integrates with BitPay (a global Bitcoin payment service provider) so a business can now accept online Bitcoin payments. Intuit also provides a blog post regarding Bitcoin taxation:

Even though it is considered property, the IRS recognizes that virtual currencies are used to buy and sell goods and services. If you receive bitcoins for providing goods or services, you will need to include in your earnings the fair market value of the virtual currency used on the date it was received. Likewise, if you pay for goods and services using bitcoin, you will need to include in your expenses the fair market value in U.S. dollars of the virtual currency as of the date it was paid out.

LibraTax is another company focused on helping users figure out their taxes in regards to Bitcoin. They have a very straightforward blog post that is easy to read. If you are an individual, their offering is free of charge unless you want a report.

We at hope this post helps you wrap your head around Bitcoin taxation. Thank you for reading!

Note: We are not tax professionals. Please do your due diligence!

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