Bet your bottom dollar, you’ll want to keep a clear account of your cryptocurrency income.
In its recent IR-2018-71, the IRS warned that virtual currency transactions are taxable by law and that people who fail to report their cryptocurrency income, file cryptocurrency late, or file crypto taxes improperly may incur penalties and interest.
When the IRS speaks, you should notice!
Which accounting model should you use?
You may think that virtual currency is a digital asset and, therefore, should be recorded as such, but since cryptocurrency has no status as legal tender, the IRS requires us to treat it as a property transaction.
Among other things, this means that cryptocurrency investments are bundled under short and long-term capital gains. The amount of tax you pay depends on how long you hold your cryptocurrency.
- Short-term capital gains: If you hold Bitcoin or another cryptocurrency for less than a year, you’ll be paying regular income tax as with regular property tax. This is anywhere from 10 to 37 percent of your cryptocurrency income depending on your income level.
- Long-term capital gains: If you hoard your cryptocurrency for longer than a year, you’ll pay long-term capital gains tax, which caps at 20 percent of your cryptocurrency income.
The crazy implication of this plan is that the longer you sit on your Bitcoin, the fewer taxes you pay – which is more reason to “hodl” your currency.
7 other IRS implications and rules
- Payment made using virtual currency has to be reported using the same rules as any other payment made in property. This means the taxpayer who receives virtual currency as payment for goods or services reports how much that digital currency was in USD on the date that cryptocurrency was received. All transactions are converted to and reported in U.S. Dollars.
- Payment made to an independent contractor, or freelancer, of $600 USD or more has to be reported on Form 1099-MISC using the fair market value of the virtual currency in U.S. Dollars of the date of payment.
- As with all property tax, it is the payee, not the payor, who deducts tax. For that reason, the payor must ask the independent contractor for a taxpayer identification number (TIN) and can only pay his worker once that is received.
- Gain or loss depends on whether the virtual currency is a capital asset, like stocks, bonds, and other investment property. If it is merely a utility token, i.e., a token used by ICOs to operate their system, there’s no tax. Tax only incurs on virtual currency that can be converted to USD, Euros or other money, namely if the coin has economic value. The IRS refers to this kind of cryptocurrency as “convertible virtual currency”.
- Someone who mines virtual currency needs to report the exchange value of any income received from that mining in USD. He uses that current exchange value on the day his income was received. Income is reported on either an IRS Form W-2 or an IRS Form 1099, depending on whether the miner works for himself or others.
- Wages paid in cryptocurrency are reported by an employer on a Form W-2.
- Wages using virtual currency to independent contractors and freelancers are taxable and the regular self-employment tax rules apply. Payers must issue Form 1099.
Foreign Asset Reporting Requirements
If you have more than 10,000 bitcoins in a non-US/ offshore account, use the following forms to report your stash:
Donating Helps you Save
Make some Bitcoin, Ether, or Dash donations to some non-profit charity, and you may be able to see some deductions on your taxes as well as avoid tax on your gains. This applies only to cryptocurrency that has recognizable value.
Cryptocurrency Amendments since Jan. 1, 2018
- No More Like-for-Like loophole
Like-for-like allows you to swap one item for a similar one within a certain time period (typically 180 days), so you may be able to avoid taxes. Since the IRS pegs cryptocurrency as property, and since property investors use the like-for-like loophole for assets like real estate, art, or racehorses, you’d think we’d have this loophole for Bitcoin too. The loophole existed until the current administration did away with it in January 2018.
- No more Cryptocurrency Tax Fairness Act
Before the Trump administration, there was a Cryptocurrency Tax Fairness Act (CFTA) that waived tax from cryptocurrency transactions under $600. So, say, you used Bitcoin to buy a cup of coffee, you didn’t need to add tax to that Bitcoin transaction. The new tax rules added tax to every itty-bitty purchase – that cup of coffee too.
Bonus: 3 cryptocurrency tax resources
- Coinbase – A free tool for calculating cryptocurrency taxes that, more or less, works as long as you use it for simple hoarding, rather than trading, and as long as you stash your cryptocurrency with Coinbase. (Warning: The moment you send your coins to an external wallet or another site, Coinbase may inaccurately report these transactions as “sales”).
- BitcoinTax – There’s a free version for transactions done by any cryptocurrency, as long as the transactions are simple and deal with small amounts, For unlimited and more complex transactions, BitcoinTax offers a 19.95 version per tax year. This option is your closest to a qualified accountant and may be valuable if you trade in cryptocurrency.
- Bitcoin Tax Attorneys, CPAs, and Accountants – For complex trading and accounts, you’ll likely want a qualified tax attorney, CPA or tax accountant who knows Bitcoin and digital currencies. That’s where the Directory of Bitcoin Tax Professionals helps you.