How to File Taxes on Bitcoin & Cryptocurrencies
I will reference Bitcoin here, but note that these general guidelines apply to other cryptocurrencies also. None of this is legal advice. Please consult with a tax lawyer or accountant concerning your tax preperations.
Keep Everything Documented
Much like holding onto receipts, keeping a log of your Bitcoin sales is a good practice. Using an application like CoinTracker (outlined below) or Bitcoin.tax is a great ways to keep track of your transactions, especially if you trade often.
If you buy Bitcoin and never sell, you have not realized any gains or losses and therefore don’t have to worry about taxes yet. However, if you’ve used Bitcoin to buy something or used to to purchase other coins, you may have begun to accrue taxable income.
For each trade – partial or complete – you’ll need to have the following info:
- When you bought the coins
- How much you paid for them (in USD)
- When you sold the coins
- How much you received for them
No one is going to remind you to put aside money for tax time, but you will face consequences if you don’t pay.
Penalties for Not Paying
In 2016, the IRS requested the Coinbase records of everybody who bought Bitcoin from 2013 to 2015. After reviewing tax returns from those years, the IRS found that only about 800 people reported their bitcoin gains. As it stands now, Coinbase will only report those who’ve realized $20,000 in gains and had at least 200 transactions.
If the IRS finds out you skipped out on paying taxes, you’ll be seen as any other tax evader. They send you a deficiency notice which you can either pay or contest. Common fees include a “substantial understatement” penalty and “negligence or disregard of the rules” penalty, which is 20% on top of the net understatement of tax. If the IRS thinks you knew about the Bitcoin tax rates and laws and faked your tax return anyway, it could charge you another 75% of the underpayment for fraud.
Where to File Bitcoin Income Taxes
I you’ve bought Bitcoin & then sold at a higher prices back into fiat money, this is for you. You will need to report any income from sales on Schedule D, an attachment to Form 1040.
How you report the sales depends on when you bought your Bitcoin. If you’ve held your Bitcoin less than one year before touching it, it’s taxed as a short-term capital gain, which is taxed at the same rate as regular income. But if you’ve squirreled away your Bitcoin longer than one year before using it, Bitcoin is taxed as a long-term capital gain at a lower rate – anywhere from 0 to 20 percent, depending on what income bracket you fall under. If you’re in the top three highest income brackets, you also have to pay a 3.8% tax on net investment income. (It’s also worth noting that while not being taxed as ordinary income, capital gains may increase your overall adjusted gross income, which could impact which tax bracket you ultimately fall under.)
How Bitcoin is Taxed:
Taxes on Mining Bitcoin
Earnings made from mining Bitcoin or other cryptocurrency must be reported as part of your gross income. They’re calculated using the “fair market value” of the coin the day it was mined. If the mining counts as a trade or business transaction & you, the taxpayer, aren’t doing it for an employer but for yourself, you have to pay the self-employment tax, which is 15.3% on the first $127,000 of your net income & 2.9% on any income in excess of $128,400.
If you were paid for goods or services in Bitcoin, it gets taxed as regular income. It technically is income, just in a digital currency rather than paper money.
If you have any other questions, you can look to the guidance on virtual currencies released by the IRS in 2014. It’s a few years old, but it’s still the IRS’s best guidance on the issue, and the agency referred questions back to the 2014 document when asked for comment.
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