How to file your income taxes on bitcoin in 2018

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incometax

#1


The Verge

It’s been a turbulent year for bitcoin, and now it’s time to talk about taxes. Most people who held on to bitcoin over the past year made money off of it, and as Americans prepare for income tax season, the IRS wants its cut of the profits. Amid unprecedented gains — and unprecedented enforcement efforts — this looks to be the year that tax collectors get serious about bitcoin earnings, which means it’s a very good time to make sure you’re doing everything right.

So let’s get into what you’re reporting and how to report it. To simplify things, we’re only talking about bitcoin here, but note that these general guidelines apply to other cryptocurrencies as well. Also, none of this is legal advice, so if you have specific questions, it’s best to consult with a tax lawyer or accountant.

Document everything

We’re talking about income tax, so your goal is to figure out your income from bitcoin in 2017. For the purposes of the IRS, that means bitcoin assets that were converted into non-bitcoin assets like cash or goods and services. Your bitcoin holdings aren’t taxable (at least not yet), but any time you sold bitcoin or used it to buy something, you were accruing taxable income.

You’ve already got records of most of those transactions, either on the blockchain or from your wallet provider, but converting it to dollars can be a real hassle since you’ll need to run the bitcoin value against the price of bitcoin at the time of the transaction. (You can look up the historical price of bitcoin here.)

Do your best to document everything

First, you’ll want to download all transaction data from the exchanges you use, usually available as CSV files, suggests Vincenzo Villamena, managing partner at Online Taxman, an accounting firm that specializes in cryptocurrency. Some exchanges, like Coinbase, will send certain US users form 1099-K if they have received “at least $20,000 cash for sales of cryptocurrency related to at least 200 transactions in a calendar year.” If you don’t use an exchange, just do your best to document everything.

There is also software that can help with doing bitcoin taxes, such as Bitcoin.Tax and CoinTracking.Info. Bitcoin.Tax lets you upload CSV files from exchanges, and it’s free for up to 100 transactions. CoinTracking.Info does the same, and it’s free for up to 200 transactions. (As pointed out by Forbes, which reviewed both software, the programs let you cherry-pick which accounting method you’d report by after the year has ended. Some of the methods may not be IRS compliant.)

Where to report Bitcoin income

Most people will have income from buying bitcoin and then selling it at a higher price. If that’s true for you, then any income from the sales needs to be reported on Schedule D, an attachment to Form 1040.

How you report the sales will depend on how long ago you bought your bitcoin. If you’ve held the bitcoin less than a year before transacting with it, it’s taxed as a short-term capital gain, which is still taxed at the same rate as ordinary income. But if you’ve held bitcoin longer than a year before using it, bitcoin is taxed as a long-term capital gain at lower rates of anywhere from 0 to 20 percent, also 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 percent 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.)

In every case, the tax rate on your bitcoin sales depends on your method of acquiring bitcoin and the length of time you’ve held it. Here’s a chart, because it’s complicated. Just know you’ll be making heavy use of the first few pages of your tax return as well as Schedule D.

HOW BITCOIN IS TAXED

Things get more interesting if you were mining your own bitcoin. Any bitcoin gained through mining is taxed as ordinary income, based on the “fair market value” of the bitcoin at the date it was received. (Again, you can look up the historical price of bitcoin here.) Additionally, if the mining counts as a trade or business transaction, and the taxpayer isn’t doing it for an employer but for themselves, they have to pay the self-employment tax, which is 15.3 percent on the first $127,200 of net income and 2.9 percent on any income in excess of $128,400.

If you were paid for goods or services in bitcoin, it gets taxed as ordinary income. (It technically is income, just in a different currency.) Depending on your income bracket for 2017, the federal tax rate can be anywhere from 10 percent to 39.6 percent. The bitcoin will also be subject to state income tax.

If your bitcoin account is held abroad where the private keys are owned directly by the exchange, you get double the fun: the value of the account has to be reported to the US Treasury using FinCen form 114, and to the IRS with the form 8938. US residents and citizens who own less than $10,000 of assets abroad don’t have to report.

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.

On August 1st last year, bitcoin was forked into two digital currencies: bitcoin and bitcoin cash. The new bitcoin cash is also taxable income, although the IRS has not yet addressed this event and provided guidance for cryptocurrency forks.

“The problem is, we have the tax code, we have all the regulations, we have this 2014 notice which now seems like it’s 100 years old and so we don’t have any guidance,” says Connecticut-based tax lawyer Suzanne Walsh. “The IRS is going to come out and say, here’s what this is and right now we’re only guessing.”

Other new changes
The Republican tax reform bill that passed in December not only shifted around tax income brackets, but it also cut out a bitcoin investor loophole. This will only take effect when filing 2018 taxes in 2019. The bill eliminated an exemption where bitcoin investors switching over to Ethereum, litecoin, or other altcoins could defer paying taxes on the original bitcoin. This was known as a “like kind exchange,” also known as a 1031 exchange. In 2018 tax returns, that exemption will only apply to “real property,” meaning real estate.

Why you really shouldn’t skip out on Bitcoin taxes

The IRS has gone after bitcoin tax evaders before. In 2016, the IRS requested the Coinbase records of all the people who bought bitcoin from 2013 to 2015. After examining tax returns from those years, the IRS found that only 800 some people reported their bitcoin gains on the form 8949 each year. (Form 8949 is a summary of bitcoin gains that basically supplements form 1099, which cryptocurrency taxpayers don’t get from exchanges.)

The IRS partnered in 2015 with a company called Chainanalysis to identify owners of digital wallets who haven’t been paying their bitcoin taxes, according to a contract discovered by The Daily Beast last year. Still, Chainanalysis only has information on 25 percent of all bitcoin addresses, its co-founder Jonathan Lewis wrote to the IRS, meaning that the other 75 percent remain anonymous. It’s likely that the IRS will continue to have to lean on outside consultants like Chainanalysis, says Walsh.

If the IRS catches on that you didn’t pay the tax, you’ll be dealt with like any other tax evader. You’ll be sent a deficiency notice which you can either pay or contest. And the IRS could always later catch you in a regular audit, says Walsh. Common fees include a “substantial understatement” penalty and “negligence or disregard of the rules” penalty, which are an additional 20 percent 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 will charge you an additional 75 percent of the underpayment for fraud.

“It’s obviously directly fraudulent.”
It’s also likely that your accountant won’t sign off on a tax return where you underreported capital gains, due to ethical concerns. “Willingly knowing that somebody had capital gains that were reportable is like a pretty bad offense. It’s obviously directly fraudulent,” says Villamena. “It’s a lot worse than if someone just added an extra meal expense that was obviously social and business together.”

Ways to minimize bitcoin taxes

You can donate cryptocurrency to charities but you must donate directly to the charity, as selling it first would be taxable. While charities like Goodwill may not accept bitcoin, you can still donate to causes like The Water Project, Wikileaks, and the Internet Archive to name a few. Robert Wood, a tax lawyer who’s written on cryptocurrency taxes for Coin Telegraph, says, donating bitcoin to charity “can be a smart move, generating a tax deduction for the market value, without having to pay tax on the appreciation.”

You can also hold on to the bitcoin long-term, disregarding the downturn in bitcoin prices recently and any desire to cash out early, in order to defer taxation, Villamena suggests.

He also added that since his firm has an international focus and many of his clients have foreign spouses, he sometimes recommends them to hold their cryptocurrency under their spouses’ names. Other countries have lower tax rates than the US. Germany, for instance, treats cryptocurrency as a currency, while Denmark doesn’t tax capital gains.

This is all we know about US tax laws on bitcoin so far. It’s enough to answer most questions, but as cryptocurrencies keep evolving, and new situations like bitcoin forks arise, we’ll soon need more guidance from the IRS.


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#2

Cointracking.info is amazing!


#3

I’ve told everyone interested that BCH was trading at $275 on the August 1 fork date. Use that as your ordinary income amount per BCH received. If you held BTC on that date you received BCH even if you have yet to get it. It is taxable on a principle referred to as “constructive receipt”

If you have any questions on this just Google “irs constructive receipt rules”


#4

You guys should checkout happytax.com. They have crypto experts that will help you with your taxes.


#5

Peter… would you know of anybody in the upstate SC, specifically in Greenville SC, that could provide services for me… I ve reach out to several CPA’s in my area and none of them dealt with cryptos… I would like my taxes to be done by somebody that actually knows how to do it right… I am willing to drive to out of state if if it can be done that way… I just want my taxes to be done right … thank you


#6

I know someone in SC that can help. Ping me.


#7

Wow, great…hit me up with the address and the CPA John…thanks so much


#9

Sending this to my wife, she definitely will want to see this.


#10

I get it that every coin sell or conversion creates a taxable event. Almost impossible to track, so I am doing it myself on excel … BUT … answer this.

I buy a bitcoin at $8000 and then a month later I buy a bitcoin at $12000. I decide to send a bitcoin to an exchange to trade alt coins. WHO is going to decide WHICH bitcoin I transferred. The 8k or the 12k ??? This confuses me on how to track.

Thanks


#11

You would be better off using software like cointracking.info, cointracker.io or bitcoin.tax. Then you can use different methods like First In First Out, Last In First Out and etc. to calculate.


#12

There is no gain or loss on a transfer to an other exchange unless you pay the transfer fees from the bitcoin that you sent there. Then there would be a gain/ loss calculation just on the transfer fee. Say the fee was 10 Satoshis. What was that worth in US Dollars on the day of the transfer? How much did you pay to acquire those Satoshis.

As to how you calculate the cost: Did you sell any crypto in the past few years that you HAVE reported on your tax return? If you did sell and report use the same method you used last time. I’d guess that you specifically identified a coin that you had in inventory. If you’ve never reported anything you can choose an inventory method that benefits you (you may want to use the coin that costs the most per Satoshi). That’s how you decide what cost to use.

I agree. This is totally no fun. Uggghhh!

Let me know if I can assist in this further.


#13

I have two question

#1. Say I bought bitcoin for my brother then transfer it to poloinex and then bought ripple then took all the ripple and sent it to his poloinex account would it be his tax or will I have to pay both the bitcoin to ripple gain or loss and then ripple to ripple tax cause I sent to him

#2. If I bought say ltc and I sent it to my girlfriend ltc account will I have to pay any capital gains on this or will she pay it thanks (same day trade)


#14

Would anyone know about taxes for traders?

Seriously considering moving out of the country haha… jk


#15

If it was done under your name on the exchange I would pay it and take it out of his coins. Either way one of you has to pay it and because it was done under my your name in the US that means you would ultimately be responsible for the gains. So make sure you are square so that you can continue to help your family and friends.

I am not real sure on this one as there different tax laws when giving stuff away. Maybe @Peter_Rehm could assist here but I highly recommend you get a CPA involved if you are doing a lot of transfers between family members. These laws are also dependent on what country you are in.


#16

This question is too vague to even help direct you. If you are talking about on an exchange then yes you have a taxable event every time you change one coin for another even if it is a loss.


#17
  1. You would pay tax when you convert the coin to ripple. When you sent to your friend, he will take your basis and pay tax on any conversions. Unless you are paying him for goods or services.

  2. Sending to your girlfriend is like a gift (unless you are paying her for goods or services). So again she will take your basis and will have to pay taxes on any gains that you didn’t.


#18

What’s your question?


#19

ahh i see, i think there is a special tax code for day traders where they file their gains as incomes as opposed to capital gains and also being able to list losses and expenses.

I was wondering if there is anything similar to that for people day trading cryptos.


#20

Yes you fall under the same rules it is not just for “day traders”

I just gave my CPA 20 pages of trades and mining transactions.


#21

It applies to stock only unfortunately. My CPA peers and I had a whole debate about this then someone pulled up the reg and squashed all refutes.