Bitcoin – Tax Treatment by IRS

bitcoin.jpgAre you among the fortunate ones who hopped aboard the Bitcoin trade early in the game and rode it to its peak before cashing in? Or are you like most who started scooping up this crypto currency right before the crash? Perhaps you are somewhere in between? Whatever your situation, there are a few possible tax implications you should be aware of.

Here’s what you need to know.

How is Bitcoin Treated by the IRS?

Although Bitcoin and the lot of similar crypto-assets are referred to as currencies by name, they are treated as capital assets for tax purposes. What are capital assets? Well, the legal definition of “capital asset” is rather long and a real snooze fest so I’ll keep it simple. Capital assets include things like land, investment properties, stocks, bonds, historical works of art, and, of course, your Furby collection. Ok, I’ll admit that last one doesn’t qualify, but basically anything significant one owns for investment purposes can be considered a capital asset.

Let’s look at an example. Say you cash in $5,000 of those savings bonds from Granny and rather than use them for college like she hoped for, you buy some Bitcoin. Fast forward down the road, you decide to follow Granny’s college plan and you sell them for $10,000. Guess what? Well, Granny’s proud but you just created a tax liability for yourself on $5,000. How much you ask? That depends on timing. Generally, if you owned that Bitcoin for longer than a year, the income will be treated as a capital gain and taxed at a rate of either 0%, 15% or 20%. If you held it for less than a year, that $5,000 gain will be taxed as ordinary income at rates ranging from 10-37%. You may be subject to an additional 3.8% net investment income tax on top of that. Yikes! Fortunately, these gains can be offset with losses from other capital assets to effectively reduce taxes. Note: Before buying anything with Bitcoin be aware that you may inadvertently trigger a taxable event when doing so.

The Tax Man Cometh

In November of 2016 the IRS requested the transaction records of over 14,000 Coinbase users. Coinbase, one of the largest crypto currency exchanges in the world, fought the request the best they could but guess what? Much like the time British rock bank, The Clash, fought the law and the law won, Coinbase fought the IRS and the IRS won. In November of 2017, they were court ordered to hand over the goods. It is important to note that only those with $20,000 or more in transactions during a single year were targeted. So, if you are one of the of 6 million plus Coinbase users that applies to, and you haven’t been reporting your Bitcoin gains to the IRS, you might want to contact a tax professional. If that’s not you, but you have been dabbling in the crypto currency space, please recognize the precedent that’s been set here. The IRS is looking for income to tax and the crypto-currency space is ripe for the picking.  It is possible that all exchanges in this market will be required to produce and issue a 1099 or something of the like to both the IRS and users of the platform. In the meantime, make sure you are keeping good records of all your transactions including dates, buy prices, sell prices etc. If you need help setting this up, please give us a call!

Other Considerations

Crypto currencies held in foreign exchanges may be subject to IRS Foreign Bank and Financial Accounts (FBAR) reporting requirements.

If you were actively trading crypto-currencies during the year, you may be eligible to make the Sec. 475 Mark-to-Market election. Ask us how.

If you made a speculative investment in a crypto-currency that turned out to be a dud, it may meet the “worthless security” criteria.

If any of these situations applies to you, feel free to give us a call to discuss at 203-489-0612 or contact us online. We would be happy to help you sort out your crypto-dilemma!