Bit Into Bitcoin? What You Need to Know for Tax Season
December 15 2017
If you haven’t noticed, Bitcoin and other virtual currencies have landed on the scene. And with its current performance in the stock market, it seems with good footing. With these new investments come many questions – importantly, how does the investment affect your taxes? The IRS has just recently shed light on the matter. Bitcoin holds the position of the most widely circulated virtual currency. And the IRS considers it a convertible virtual currency because its value equals real currency. Therefore, how you use and hold Bitcoin affects its tax implications.
Luckily, we have the knowhow to navigate the new currency smartly, just below.
Mining Bitcoin? You must report it as income.
If you ‘mine’ Bitcoin, the act of validating transactions and maintaining the public virtual currency ledger, you must include earnings in your gross income. Easy enough right? You must also ensure that you decipher it’s fair market value on the day it was mined. And if you mine Bitcoin in a self-employed capacity, the self-employment tax (minus allowed deductions) applies.
Using it to pay for goods and services? The IRS taxes virtual currency as income.
If you are ahead of the curve and paying your employees in virtual currency, you must report it on W-2s. It works just like standard wages, and withholdings as well. However, just like mining, you must convert the currency into dollar value on the date of each payment.
As an employee, you must report your total wages in dollars by converting Bitcoin earnings and adding them to regular dollar wages. If you’re self-employed and have gains/losses from sales transactions these amounts must also be converted and reported.
Holding it as Capital? The IRS taxes virtual currency as property.
Bitcoin held as a capital asset must be reported as property. Think of this type of Bitcoin relative to property transactions, and the same tax laws apply. If you hold the virtual currency as stocks or bonds, taxes will apply to gains and losses the same way as capital gains and losses.
As a new currency arises with a sharp rise in valuation (from $1,000 to $19,000 between January and December), so does interest. Many Bitcoin owners are selling their investments to reap the rewards. If you fall into one of the three situations above, make sure to keep meticulous records of valuation at gain and loss. But keep in mind that it’s not as complicated as it might seem. Consult your tax professional to ensure that you are realizing all gains and losses, reporting correctly, and wisely navigate the new terrain virtual currency is blazing.
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