Tax Blog

Can/Should Bitcoin Earnings And Losses Be Reported On Your Taxes?

Can/Should Bitcoin Earnings And Losses Be Reported On Your Taxes?

Because Bitcoin has only been around since 2009, it still constitutes a murky area for many taxpayers. We asked the experts to set us straight on tax requirements for Bitcoin. Read on to learn more.

Kieran Smith

Kieran Smith

Kieran Smith, Cryptocurrency analyst at Bitcopy Company.

Very few…

Very few jurisdictions don’t tax cryptocurrency, so most big cryptocurrency winners will find themselves owing tax of some form. But given the libertarian appeal of the technology, cryptocurrency owners may find themselves averse to paying taxes. Hence we have seen a large amount of “mysterious boating accidents” in which the private keys controlling cryptocurrency are tossed overboard in a moment of carelessness, never to be found again.

These “boating accidents” which proliferated on Twitter after privacy coin Monero developer Riccardo Spagni kickstarted the trend, are more than just an apt metaphor.

They represent the myriad loopholes in laws that allow cryptocurrency users to escape taxes. This can be through lending — and borrowing fiat against their cryptocurrency to avoid creating a taxable event, or by evasion, with some seeking to avoid putting winnings in the bank at all, and instead of using cryptocurrency debit cards to spend funds where the authorities can’t see.

Ryan Scribner

Ryan Scribner

Ryan Scribner is the co-owner of the personal finance blog Investing Simple. He started his entrepreneurial journey back in 2016 when he launched his YouTube Channel.

Until you sell

In the eyes of the IRS, Bitcoin is viewed as an asset and not a currency. As such, taxes are due on capital gains from transactions. US taxpayers need to keep track of all cryptocurrency transactions. It is imperative that you have this information. Unlike a brokerage account, these crypto accounts do not keep track of your cost basis for you. This is because you can freely send and receive Bitcoin from that account. It is impossible to keep track of the cost basis. You should create a spreadsheet where you log all Bitcoin transactions.

Remember, you don’t owe any taxes until you sell and recognize a capital gain. If you do sell, you will need to figure out your average cost basis versus what you sold for, which is your capital gain. If Bitcoins are held for less than a year, this would be a short term capital gain. If they were held for longer than a year, it is a long term capital gain.

Milos Djordjevic

Milos Djordjevic

Milos Djordjevic. With a passion for saving money and knowledge of financial matters, Milos successfully leads SaveMyCent guided by a wish to bring you the best coupon deals in America.

Yes and no

To answer your question, yes and no. The most important thing is to keep track of every single BTC transaction you made since the IRS is pretty heavy-handed when it comes to cryptocurrency. Legally, you will not get taxed if your taxable income amounts to less than $79k. However, this is only valid if you held your bitcoin for over a year, which falls under a “long-term capital gain” as far as the IRS is concerned. Even if you are exempt, it’s still important to keep track of every single bitcoin transaction in case you get audited, so you can prove everything is legit.

If you spend your bitcoins the same year you bought or profited from their sale, then you need to declare it as part of your annual income tax. Any purchases made with bitcoins at grocery stores, ATMs, or basically any transaction that converts BTC to FIAT currency, is also subject to tax. The good news is you can declare mining resources as business expenses to try and offset the increased income. So everything from internet providers to mining rigs and anything associated with your bitcoin gains can be declared as a business expense.

Thomas Bradbury

Thomas Bradbury

Thomas Bradbury, Technical Director at GetSongkey.

Depends on what type of Bitcoin you have

Bitcoin is still a relatively new concept for many people, especially when it comes to investing and trading with cryptocurrencies.

Whether or not Bitcoin earnings should be reported on your taxes – this is one of the most common questions in the industry today. The answer is yes, of course. It is an earning that you get – similar to how money made from other investments would be reported on your tax documents.

Form 1040 has an attachment called Schedule D. This is the document where all earnings through Bitcoin investments and trading opportunities need to be reported.

Make sure to read through the attachment and fill out the part under the correct heading. This would be either capital gain or ordinary income – depending on what type of Bitcoin investments you have.

Bottom Line: Bitcoin investment profits must be reported on your tax documents.

Nate Nead

Nate Nead

Nate Nead, CEO at ROI.me.

Can and should be reported

Bitcoin is considered a holder of value, a medium of exchange, a financial instrument, and in some cases (depending on how it’s treated) security. As such, any gains and losses incurred in holding, trading, or otherwise transacting with Bitcoin can and should be reported on annual tax returns. Numerous precedent incidences have occurred wherein the IRS has sought taxes and penalties from those who have adhered to this course of action.

Ryan Reiffert

Ryan Reiffert

Ryan Reiffert is an attorney in San Antonio, Texas. He has been practicing law since 2011 and is the founder of the newly-opened Law Offices of Ryan Reiffert, PLLC, a boutique business, and corporate law practice.

Some required to report

The IRS does require you to report bitcoin earnings, and some exchanges have been required to report transactions to the IRS. Of course, there may be some cases where enforcement is unlikely, but under the Internal Revenue Code, income tax is payable on “all income, from whatever source derived” (after explicitly listed exceptions, deductions, etc.)

Beth Logan

Beth Logan, EA with seven years of experience as a tax professional. Find her here: Kozlog Tax Advisers

BitCoin earnings are taxable by law

While there is not a specific law or regulation regarding the taxing of BitCoin earnings, there is a law that includes it as taxable. Basically, the US tax code says that all income from all sources is taxable unless there is a portion of the code that states it is not taxable. Therefore, BitCoin earnings are taxable by law.

The losses should be reported because they are likely to reduce the owner’s tax liability.

The gains should be reported because they are legally required to be reported, and the IRS is spending money to find owners that are not reporting the earnings. Also, there is a question on Sch. 1 about cryptocurrency. By signing your tax return, you are stating that you provided accurate information. As a BitCoin participant, your choices are:

  1. To not mark that box and commit fraud (lying on your tax return).
  2. Check the box but not include the earnings or losses. If you do not include the losses, then you likely are paying more in taxes. If you do not include the earnings, you have just told the IRS “I am not reporting these.”
  3. Check the box and report as required.

Granted, people do commit tax fraud every year. I do not recommend it. As I mentioned, the IRS is actively looking for cryptocurrency users.

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