You may have heard about the extreme price increases of Bitcoin and other cryptocurrencies and may be wondering, are bitcoin profits taxable? Bitcoin’s astounding value of almost $20,000 per coin in 2017, from less than $400 per coin in 2016, has caused many owners to sell, or at least to think about, selling all or part of their investment. As tax season approaches, it may not be immediately clear how the IRS imposes taxes on Bitcoin: Are the profits income? Are they capital gains or something else entirely?
Bitcoin is a digital, or virtual currency created in 2009 by an unknown person using the alias Satoshi Nakamoto. Bitcoin uses blockchain; a new and fascinating technology innovation. A blockchain is a list of continually growing records, which are linked and secured using cryptography. It uses an open and verifiable public ledger that can record transactions between two parties securely.
Bitcoin offers lower transaction fees, an anonymity of transactions, and is operated outside of government and financial institution controls. Meaning that no banks are needed to facilitate transactions or verify ownership. It’s a new and innovative payment network. Essentially, it’s a new type of money.
Bitcoin are stored in a virtual or “digital wallet,” which resides either on the Internet or on a user’s computer. The wallet is a kind of virtual holding account that allows users to send or receive Bitcoin, to pay for goods or to store their coins.
Attn: Crypto Investors … Are Bitcoin Profits Taxable?
The IRS taxes Bitcoin as a capital asset, which is similar to how stock investments are taxed. Profits from Bitcoin investments that are sold and held for less than a year would be taxed as regular income. The tax rate would be at your highest income tax rate. Profits from Bitcoin investments sold and held for more than a year are considered long-term gains and are taxed at 15% in most cases.
To properly calculate your gains or losses on Bitcoin transactions, information from each sale, trade or purchase made with Bitcoin needs to be obtained. This includes the cost basis for each amount of Bitcoin you sold, the purchase date, the sale date, and the selling price.
Capital Gains Tax
There is no taxable event until Bitcoin are sold, traded or used to make purchases. An investor who hasn’t sold their Bitcoin has “unrealized” gains or losses. When Bitcoin are sold, traded or used to make purchases, the gains become “realized” and a taxable event is created. If the supposed Bitcoin bubble pops, then losses would be deductible up to $3,000 per year, with any excess carried over to future years.
Bitcoin and Taxes … it’s complicated
The process of calculating taxes on Bitcoin transactions is quite complicated. If you are a Bitcoin investor, you don’t want to get in trouble with the IRS for not reporting your Bitcoin profits. They are actively obtaining financial records from major Bitcoin platforms like Coinbase and others. The IRS is paying close attention and has issued guidance on tax reporting. In addition, you could be subject to penalties and interest for failing to comply with tax regulations.
In closing, every Bitcoin or cryptocurrency transaction is potentially a taxable transaction. If you need help with a tax issue related to Bitcoin or other virtual currency, then contact me. My name is Noel, and I would be delighted to work with you on your taxes. I’m an Illinois Registered Certified Public Accountant with over 23 years of experience, dedicated to providing outstanding tax and accounting services to individuals and small businesses in the Chicagoland area. Contact me to schedule a consultation.
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My name is Noel B. Lorenzana, and I would be delighted to work with you on your taxes. I’m a Registered Certified Public Accountant with over 23 years of experience, dedicated to providing outstanding tax and accounting services to individuals and small businesses. My offices are virtual, so I can help you wherever you are located.
The information presented in the above article is general in nature, and not warranted or guaranteed. Your situation is specific to you alone, so be sure to speak with a Certified Public Accountant or a trusted tax advisor.