By Josiah Wilmoth
Bitcoin and other cryptocurrencies have experienced astronomical price increases in 2017, enabling many investors to reap significant profits from their investments. However, many investors express confusion about the correct way to report investment income to the Internal Revenue Service (IRS). Thankfully, the IRS has issued bitcoin tax guidelines that make it relatively easy for investors to remain in compliance, as long as they practice sufficient record-keeping.
Below, this guide explains the steps investors should take to comply with IRS guidelines for cryptocurrency investing:
Bitcoin Tax Guide: An Overview
The IRS issued guidance for cryptocurrency users in 2014. According to the bulletin, bitcoin and other cryptocurrencies are classified as property for federal tax purposes. From the notice:
“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”
Consequently, cryptocurrency is taxed similarly to USD in many cases (though not all). If an employer pays wages in cryptocurrency, the employee must report it as income for tax purposes. If a business accepts cryptocurrency payments, it must pay tax on the fair market value of the cryptocurrency at the time of the sale; this is why many companies use payment processors such as BitPay to automatically convert bitcoin payments into USD at the point of sale.
Where the property classification becomes most significant for bitcoin users is when it is used to pay for goods or services. Because the IRS does not currently treat cryptocurrency as currency–even when it is used in this manner–U.S. residents are required to keep detailed records of every cryptocurrency transaction–even for transactions as minor as purchasing a cup of coffee–and report profit or loss realized at the time the transaction was executed.
Bitcoin Tax Considerations for Investors
Although the property classification makes bitcoin tax reporting a burden for ordinary users, reporting requirements will be quite familiar to sophisticated investors. If held as a capital asset, cryptocurrency is treated similarly to stocks, bonds, and other conventional investments.
When investors sell their cryptocurrency holdings at a profit, they must pay either short- or long-term capital gains taxes, depending on how long they held the asset. Similarly, investors may offset their tax bill by declaring capital losses on cryptocurrency investments they sell for less than their cost basis.
Despite these guidelines, the IRS says that many investors neglect to report cryptocurrency investment income on their tax returns, either because they are unaware they must do so or because they mistakenly believe they can hide this income from the government.
Investors should also remember that although cryptocurrency is treated as property for federal tax purposes, states and local jurisdictions may classify it differently. Investors should obtain professional tax guidance to ensure they comply with all applicable regulations.
Strategic Coin is your go-to source for cryptocurrency investment research and education. Whether you need help understanding the basics of blockchain technology or desire to read an in-depth analysis of the latest initial coin offering, Strategic Coin will provide you with the information you need to take advantage of market opportunities within the crypto finance industry.
Note: This guide is intended for informational purposes only. Consult your tax adviser for specific guidance on how to comply with bitcoin tax regulations.
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