How Bitcoin Is Taxed
Bitcoin and its comrade cryptocurrencies appeal to users because they are secure and provide a degree of anonymity. It’s that anonymity, along with the growing value of cryptocurrency transactions taking place worldwide, that has increasingly drawn attention from the Internal Revenue Service in recent years.
Since you can use Bitcoin and other cryptocurrencies for everything from online shopping to donating to charity, you might assume the IRS treats cryptocurrency like cash. That assumption can get you into hot water.
According to IRS Notice 2014-21, the IRS classifies cryptocurrencies as property, not cash or currency. That means it treats Bitcoin transactions like sales of stocks and other investments. Purchasing cryptocurrency with cash and holding on to it isn’t a taxable transaction, but selling, exchanging, or using it to purchase goods and services is.
For example, say you purchase 10 crypto coins for $10 on December 1, 2020, and load them onto a cryptocurrency debit card. On December 20, 2020, that cryptocurrency is trading for $5 per coin, up from the $1 per coin you paid for it back at the beginning of December. On that day, you use your cryptocurrency debit card to pay for a $5 cup of coffee.
On your 2021 tax return, you are supposed to report a $4 short-term capital gain . That’s the $5 per coin value you received when you purchased the cup of coffee, minus your $1 per-coin basis in the cryptocurrency.
Gather Information For Bitcoin Tax Reporting
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For each transaction, you need to know the following:
- The amount you spent to buy the cryptocurrency
- The date you purchased them
- The date you sold or exchanged the coins
- The amount in dollars the cryptocurrency was worth when you sold it
When you sell stocks, at the end of the year, your broker will send you a Form 1099-B that includes all of the necessary information to report those sales on your tax return. But don’t expect the same service from a cryptocurrency exchange. Most crypto exchanges only send 1099 forms to customers with gross payments over $20,000 or more than 200 cryptocurrency transactions during the year.
However, you can typically generate reports through your cryptocurrency exchange platform that will include all buys, sells, sends, and receipts of cryptocurrency from the account. If all of your cryptocurrency transactions take place on one exchange, gathering the information you need for tax reporting should be relatively easy. If your cryptocurrencies are scattered across several exchanges, you’ll need to download separate reports from each of them.
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Tax Time How To Calculate Your Bitcoin And Cryptocurrency Losses
Paying income taxes is certainly one of the least enjoyable duties known to mankind. And claiming your Bitcoin losses is also sure to rank as your least memorable task of late 2018. However, the Internal Revenue Service is not an authority figure to be ignored nor openly defied. Accurate, transparent reporting of your Bitcoin and cryptocurrency gains and losses will keep you off of Big Bros list of neer do wells.
Reporting To The Irs`
You might wonder how to report your Bitcoin or other cryptocurrency transactions on your annual tax return.
The basic tax rules that are applicable to property transactions apply to transactions using virtual currency. The IRS has made it clear that Bitcoin is a type of property and your transactions must be reported.
You should file Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D , Capital Gains and Losses, with your annual tax return to reflect your cryptocurrency transactions.
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If Your Bitcoin Is Stolen Tough
Being robbed is bad enough, and previously if youd been swindled of your bitcoins, you might have been able to deduct it as a theft loss on your taxes. However, the new tax rules do away with the deduction for personal theft losses.
Another tax rule doesnt look favorable for owners of digital currency, either. The IRS allows owners to trade many kinds of property for a similar kind of property without immediately incurring a tax liability its called a like-kind exchange.
Before the tax law changes, bitcoin owners wanted to know whether they could engage in like-kind transactions with other cryptocurrencies. The answer was unclear, Harris says. What was unclear was whether one crypto was like-kind to another. Now the new tax reform has limited like-kind exchanges to real property, not personal goods.
Cryptocurrencies Are Treated As Property
Contrary to what their name suggests, cryptocurrencies are not currently treated as currency in the eyes of some governments. The IRS makes clear in its official virtual currency tax guidance that cryptocurrencies are to be treated as property for tax purposes.
What does this mean?
This means that all cryptocurrencies such as Bitcoin, Ether, XRP, and other altcoins need to be treated similarly to any other form of property like stocks, real-estate, or bonds from a tax reporting perspective.
In other words, capital gains and losses tax reporting rules apply to cryptocurrencies just like they do for stocks and bonds.
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Can I Sell Cryptocurrency At A Loss And Buy It Back
Because of the advantages of reporting capital losses, some investors choose to intentionally sell their cryptocurrency at a loss to reduce their tax liability. This strategy is known as tax-loss harvesting.
Tax-loss harvesting is a well-known strategy in the world of stocks and equities. However, cryptocurrency does have one major advantage over other asset classes when it comes to tax-loss harvesting: the lack of a wash sale rule.
The wash sale rule currently applies to stocks and other securities. Capital losses cannot be claimed if a security is bought 30 days before or after a sale. At this time, this rule does not apply to virtual currencies. That means that crypto investors can sell their holdings, claim a capital loss, and buy back their assets shortly after.
This may be changing in the near-future. The House Ways and Means Committee is considering expanding the wash sale rule so that it applies to cryptocurrency starting on December 31, 2021.
My Virtual Currency Lost Value Can I Write It Off
The value of virtual currencies can fluctuate dramatically. If yours lost value since you acquired it, you could deduct the loss up to $3,000. Note: You wont report a loss until there is a taxable eventsuch as a sale. If youre holding onto the currency even though it has lost value, you wont report or deduct that loss.
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Many Bitcoin Investors Dont Plan To Report Their Gains Or Losses Even If They Lost Money
When asked whether they planned to report their bitcoin losses or gains during the upcoming tax season, only 53% of U.S. bitcoin investors from our survey said they would. While more than a third of bitcoin investors with realized losses said they planned on reporting.
At an average loss of about $718 per person, this could be a mistake, as investors can claim capital losses as a tax deduction. These losses could offset whatever gains investors experienced during the year , potentially giving them a significant tax break.
So why dont bitcoin investors plan to report?
Among respondents who sold some or all of their investment and didnt plan to report their gains or losses this year
- Most didnt think they had to report their bitcoin gains or losses because of how little they gained or lost.
- An additional 35% said they didnt believe they had a requirement to report gains or losses.
- Nearly a quarter, 22%, said they dont know how to report gains or losses.
- The remaining 5% marked other and wrote in answers, such as that theyd sold their bitcoin years ago.
What Form Should I Use To Report My Crypto Income
The form youâll need to use to report your crypto income varies depending on your specific situation.
Schedule 1 – If you earned crypto from airdrops, forks, or other crypto wages and hobby income, this is generally reported on Schedule 1 as other income.
Schedule B – If you earned staking income or interest rewards from lending out your crypto, this income is generally reported on Schedule B.
Schedule C – If you earned crypto as a business entity, like receiving payments for a job or running a cryptocurrency mining operation, this is often treated as self-employment income and is reported on Schedule C. In this case, you may be able to deduct related costs such as electricity.
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Bitcoin Taxes: 53% Dont Intend To Report
But these people could be missing out, as capital losses can be used to offset capital gains, or even claim a tax refund. After learning of the rules, over half of investors said they would be more likely to report.
In fairness, 53 percent of investors surveyed said they did intend to report gains or losses, with 19 percent undecided. Strangely, more investors who gained were likely to report than those who lost money . Or at least, thats how they answered the survey.
Reasons for not reporting included thinking losses/gains were not significant enough , and falsely believing it isnt required . 22 percent of respondents claimed they did not know how to report gains or losses.
The basic trick is to subtract the price you bought the bitcoin at from the price you sold it, leaving the profit or loss. But this might not be as easy as it sounds, according to the CEO of Libra, promoting his crypto-tax calculator. This is because cryptocurrency brokers dont have to provide customers with the same form that stockbrokers do.
Still, if youre sitting on a substantial loss, and want to claim tax relief on that, it may be worth hiring an accountant.
Will you be filing your Bitcoin taxes this year? Share below!
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Why Its Important To Claim Your Cryptocurrency Losses Taxes
Crypto is a volatile market, so you’ll likely realize losses on some transactions. Claiming crypto losses on taxes is important for two primary reasons:
In this guide, we’ll explore exactly what tax benefits crypto losses can provide.
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Example : Capital Gain Or Loss
Tim found a deal on a living room set at an online vendor that accepts Bitcoin. Tim acquired $3,500 worth of Bitcoin to buy the furniture with. By the time he bought the furniture and converted his remaining Bitcoin back into dollars, the value of Tims Bitcoin had increased by $500. The gain realized by Tim was on account of capital, so Tim has to report a $500 capital gain on his income tax return. However, only 50% of that capital gain is taxable.
Get Started With Cryptocurrency Tax Software
Thereâs no need to fill out your tax forms by hand. Today, more than 100,000 cryptocurrency investors use CryptoTrader.Tax to file their tax return in minutes.
With a few clicks, you can select each exchange you’ve used and import all of your historical transactions.
Based on this data, CryptoTrader.Tax automatically generates your crypto tax forms. You can then upload your reports directly into TurboTax or TaxAct to include with the rest of your tax return.
Alternatively, you can simply send your generated forms to your tax professionalto include with your tax return. Learn more about how CryptoTrader.Tax works here. Getting started is completely free.
Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA, or tax attorney on how you should treat the taxation of digital currencies.
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Can You Write Off Crypto Losses On Taxes
Yes. Cryptocurrencies such as bitcoin are treated as property by the IRS, and they are subject to capital gains and losses rules.
This means that when you realize losses after trading, selling, or otherwise disposing of your crypto, your losses offset your capital gains and up to $3000 of personal income.
Any net losses exceeding $3000 can be rolled forward into future tax years.
To better understand how this works, letâs explore a couple of examples.
Keeping Books And Records
If you acquire or dispose of cryptocurrency, you have to keep records of your cryptocurrency transactions. This also applies to businesses that accept cryptocurrency as payment for goods and services.
Cryptocurrency exchanges have different standards for the kinds of records they keep and how long they keep them. If you use cryptocurrency exchanges, we suggest that you export information from these exchanges periodically to avoid losing the information necessary to report your transactions. You are responsible for keeping all required records and supporting documents for at least six years from the end of the last tax year they relate to.
You should maintain the following records on your cryptocurrency transactions:
- the date of the transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party
- the exchange records
- the software costs related to managing your tax affairs.
If you are a miner, also keep the following records:
- receipts for the purchase of cryptocurrency mining hardware
- receipts to support your expenses and other records associated with the mining operation
- the mining pool details and records
For more information, please review our link on keeping records.
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How Crypto Losses Offset Capital Gains
Capital losses can also be used to offset an unlimited amount of your capital gains for the year. Letâs look at an example below.
In this case, Mitchellâs capital loss completely offsets his capital gains for the year. Because his capital loss exceeds his total capital gains, he can also deduct a portion of his income for the year.
While this example may seem simple, Mitchellâs tax calculations would become more complicated if he had both short-term and long-term capital gains and losses for the year.
How Much Tax Do I Pay On Crypto Gains
The amount of tax you pay on crypto gains depends on how long you held the asset for. If you held the asset for less than one year, your cryptocurrency gains will be taxed as a short-term capital gain , ranging from 10% 37%. If you held the asset for more than one year, it will be taxed at the long-term capital gains tax rate, ranging from 0% 20%.
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Capital Gains & Losses
This is most likely where you will need to add details into your tax return.
In March 2014, the IRS clarifying that all crypto-currencies should be treated as property for tax purposes. Therefore any gains from exchanging such property would be considered capital income, and taxed as capital gains.
Capital gains, like stocks and shares, are reported on your 1040 tax form as part of Schedule D. However, unlike stocks and shares, we don’t have a broker that works out all the figures and provides us with a 1099 form. Current Bitcoin exchanges, such as Coinbase and Circle, do not report account information to the IRS and so you are left to calculate and report these figures yourself.
Working out your capital gains can vary a lot depending on how and when you sold or spent your Bitcoins.
Buying and Selling in the Same Tax Year
If you bought Bitcoins during the tax year and also sold them all within the same year, you can simple take the amount you received on the sale, less the cost to buy them, less any fees.
For example, say you used Coinbase and bought some Bitcoins in April, spending $480, and again in May spending $450 and then sold them all in July receiving $1,200, your gain is simply:
$1,200 - = $270.
For most users, unfortunately, it is more complicated than this if they previously owned, still own, spent or traded coins.
Cost Basis
If you buy 1 BTC for $100 and sell 1 BTC for $200, then it all is fairly simple. But more often it might be:
$21.34 - = $1.64
Fees
Report Your Bitcoin Transactions
Capital gain transactions are reported on IRS Form 8949. The form is divided into two sections:
- Cryptocurrencies held for one year or less go in the short-term section. Short-term gains are taxed at the same rates as ordinary income, with the top rate being 37%.
- Cryptocurrencies held for longer than one year go in the long-term section. Long-term gains qualify for more favorable long-term capital gains rates, which cap out at 20%.
Include your totals from Form 8949. If you sold other non-crypto investments, report those on a separate Form 8949. Carry the totals from all 8949 forms to IRS Schedule D.
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