Receive all Bitcoinist news in Telegram! Editor’s note: The original introduction to this article has been replaced with one written bitcoin mining rigs for sale tax accountant Daniel Winters, which corrects some factual inaccuracies in the original. While the IRS rules have not changed since last year, it’s important to understand how to handle the taxes on Bitcoin transactions since Bitcoin income is not tax free.
Accurately reporting taxes for Bitcoin can be tricky since the IRS treats Bitcoin as property, NOT currency. Since Bitcoin is property, you need to calculate gains or losses. Global Tax Accountants is owned by Daniel Winters, who has over 12 years of tax experience and holds both a Masters of Taxation and an MBA. Daniel has written a course for accountants about Bitcoin and has been interviewed by Bloomberg and Thomson Reuters.
He has presented at the San Francisco Blockchain Conference, New York Blockchain Conference, Texas Bitcoin Conference and the New York Bitcoin Center. Under the Notice, virtual currency is treated as property, NOT currency. Though Bitcoin and other virtual currencies are a new type of capital asset, the IRS has well established rules for handling the sale of capital assets. The sale and exchange of Bitcoin is therefore treated similarly to the sale of other capital assets, such as stocks. When you buy Bitcoin, then later sell or exchange the Bitcoin, you will have a gain or loss on the transaction. For individuals, Bitcoin which is sold after being held for 1 year or less is taxed at ordinary income tax rates up to 39. Unfortunately, there is NO minimum threshold for reporting Bitcoin transactions.
Since issuing the notice, the IRS has updated the instructions for filing 2014 tax returns. The new instructions for reporting capital gains and losses on Schedule D specifically mention Bitcoin and virtual currency. Transactions in virtual currency must be reported at their fair market value in USD, therefore we need to convert the Bitcoin to USD using an appropriate exchange rate. The IRS stated only that Bitcoin must be converted into USD in a reasonable manner which is consistently applied. Also, rates vary between exchanges located in different countries, and different exchanges in the same country. Choose one source for the exchange rate, and use the same source for converting ALL Bitcoin transactions in the same year.
This is long term capital gain. Same facts, but with a different sale date. This is short term capital gain. So far, we’ve assumed that Johnny purchased the Bitcoin using fiat currency, then sold the Bitcoin for fiat currency. Instead, what if Johnny bought the 1 Bitcoin using 10 USD, then later exchanged the 1 Bitcoin for another virtual currency? We disagree and believe this situation is treated identically to selling shares of IBM and purchasing shares of Google.
Since any exchange of Bitcoin should be reported on your taxes, it is extremely important to keep good records. Bitcoin transactions from many major wallets, and can even import transactions directly from a public Bitcoin address. Bitcoin is property, and for individual taxpayers Bitcoin is generally treated as a capital asset, the same as stock. When you purchase Bitcoin, you need to record the USD value of the Bitcoin on the day of receipt. When you later sell or exchange the Bitcoin for goods or services, you need to calculate the gain or loss in USD. Just convert the amounts of Bitcoin sold into the USD value on that date, subtract your cost basis in USD and that’s the gain or loss.
Individuals who receive Bitcoin for performing services, whether as employees or independent contractors, have income equal to the USD value of the Bitcoin on the date of receipt. For employees, the income is wages and the employer should report this on Form W-2. Contractors should receive a Form 1099 and the income is subject to both income tax AND self-employment tax. However, since Bitcoin is property, the individual also holds Bitcoin with a cost basis equal to the USD value on date of receipt. Unless the Bitcoin is immediately exchanged for USD that same day, you will need to record each transaction in which you later sell or otherwise exchange the Bitcoin, and calculate the gain or loss. This is the 2nd stage of the calculation.