Bitcoin: Property You May Have Forgotten is Taxed

Even though Cryptocurrency was originally proclaimed anonymous, transactions today are transparent. Governments have observed surges of black-market trading using Crypto in the past. Exchanges now impose anti-money laundering requirements on Crypto traders to avoid drawing the ire of regulators.

The biggest change for Crypto traders, though, has been taxes.

Regulators, central bankers, and federal judges all have different opinions on how to categorize cryptocurrency. However, they all seem to agree it should be taxed. Most major countries tax cryptocurrencies similarly, too.

So, what does that mean for traders?

Nothing Matters Until it’s Put into Law

No single person has the ability to redefine an asset or unilaterally alter tax code, and little has changed since the IRS first addressed cryptocurrencies in 2014.

In the United States, IRS Notice 2014-21 defines virtual currencies as property. This means anything purchased using a digital currency is liable to be taxed as a capital gain whether short or long term depending on how long the asset was held.

For instance, if you buy a cup of coffee using Bitcoin that you purchased when it was worth $1,000, you must also account for the price of Bitcoin at the time of the coffee purchase. If Bitcoin is trading at $1,200 when you buy the coffee, you’ve purchased a dollar-denominated good with another asset that is now worth more in dollars than it used to be. That means the amount of Bitcoin you spent on the coffee will be taxed according to capital gains rules. Confusing? It might be time to see your Enrolled Agent.

While cryptocurrency brokers aren’t required to issue 1099 forms to clients, traders must disclose everything to the IRS. If not, the taxpayer could face tax evasion charges.

Taxable transactions include:  

  • Exchanging cryptocurrency for fiat money, or “cashing out”
  • Paying for goods or services, such as using Bitcoin to buy a cup of coffee
  • Exchanging one cryptocurrency for another cryptocurrency
  • Receiving mined or forked cryptocurrencies

The following are not taxable events according to the IRS:

  • Buying cryptocurrency with fiat money
  • Donating cryptocurrency to a tax-exempt non-profit or charity
  • Making a gift of cryptocurrency to a third party
  • Transferring cryptocurrency between wallets

Are some of these terms confusing you? Maybe it’s time to see your Enrolled Agent.

Bitcoin Property You May Have Forgotten is Taxed, couple, drinking coffee, crypto tax

How to Determine What You Owe

Determining how much profit you’ve made and how much you’re liable for in taxes is a bit complicated.

Cashing Out of Crypto

You must know the basis price of the curency you’re selling.

For example, if you bought Ethereum at $6,000 and sold it at $8,000 three months later, you’ll pay a short-term capital gains tax (equivalent to one’s income tax) on the $2,000 gained. If the same trade took place over a two-year timeline, long-term capital gains taxes corresponding to one’s tax bracket are applied. This is 0% for those in the 10-15% income bracket, 15% for those in the 25-35% income bracket, and 20% for those in higher brackets.

Personal Purchases 

The taxes on buying a cup of coffee with cryptocurrency are also convoluted. One must know the basis price of the Bitcoin they used to buy the coffee, then subtract it by the cost of the coffee.

Determining which coins were used to buy the coffee, their basis price and according gains, and then repeating this for every purchase only gets more complicated if the buyer is also trading coins frequently. It’s therefore vital to remember to keep all transaction information for each digital wallet and currency.

Another complication comes with the fact that this only works with gains. Declaring a loss and getting a tax deduction is relevant only for capital asset trades or for-profit transactions. If one buys Bitcoin at $8,000 and then uses it to purchase a pair of jeans when Bitcoin is worth $6,000, they can’t declare this a loss on their tax forms.

Exchanging Cryptocurrencies

Exchanging cryptocurrencies exposes investors to taxes as well. If you exchange/trade Bitcoin for another currency like Ethereum, so you’ll need to report the difference in Bitcoin’s price between when you bought it and when you spent it on Ethereum, plus make note of the price of Ethereum at its purchase time for when you sell it later.

Many exchanges help crypto traders keep all this information organized by offering free exports of all trading data, which an accountant (or a diligent enthusiast) can use to determine their tax burden. Blockchain solutions are also well-suited to record this data and highlight relevant points of tax interest.

It is always recommended to go to a tax professional when attempting to file cryptocurrency taxes. Savvy traders are already ahead of their obligations and are now focusing on the next year’s crypto market without this cloud of uncertainty over their heads.

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Jeffrey Schneider, EA, CTRS, NTPI Fellow has the knowledge and expertise to help you reach a favorable outcome with the IRS. He is the head honcho at SFS Tax & Accounting as well as an Enrolled Agent, a Certified Tax Resolution Specialist and Advanced Crypto Tax Expert.
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Author of the Now What? Help! series, Jeff defines and deconstructs IRS notices and clarifies the letters and actions the IRS will take to get what they want. He interprets the world of the IRS in a fashion that mixes attention to detail with humor to help you better understand and resolve your tax problems.

The books are available in paperback and eBook on Amazon.

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