IRS Says Cryptocurrencies Taxed Like Capital Gains AND Income

Have you spent your tax return money already? What, not even filed?

If you’re in the latter category that’s ok, you still have a full six weeks to file your income taxes for 2017 here in the USA.

There’s plenty of time to figure out what to do about those cryptocurrency gains you’ve lucked out on.

Of course, when the Internal Revenue Service is involved things aren’t simple. Depending on how the cryptos were acquired they’re treated differently by the IRS. Surprise!

For purchases of virtual currency…

For traders and anyone testing the digital money waters by buying a little bitcoin, IRS considers cryptocurrencies to be property. That’s assets, not currency.

If you have any income from selling bitcoin that you luckily purchased at a low value and sold high, then those gains are considered capital assets.

Record-keeping is on you, so you need to know if they’re short-term or long-term gains (or losses). Think dates here.

Profits must be reported as capital gains on Form 1040 – Schedule D. Losses can be used to offset gains on the same form. Thank goodness for small favors.

But what the heck ya gonna do if you’re into trading cryptos? Good luck with that!

When you have multiple trades every day, you better get into keeping excellent records. Maybe you don’t have to report any crypto profits for 2017, but lots of us will need to know what to do for our 2018 U.S. Federal Income Tax reporting. I wonder if all 50 states will have the same take on this!

For the crypto miners among us…

If you’re mining cryptos, the fair market value of the mined virtual currency is “includible in gross income.”

For some of us that income would be included in self-employment income, subjected to the self-employment tax.

All that only applies if you were lucky enough to get those graphics cards prior to December 2017. Buying GPUs after that meant you paid too much for your hardware and didn’t make much profit, or that you simply couldn’t buy enough cards to get out of hobby level mining.

Here’s a few tips for tax time…

1. Keep excellent records. Dates, times, values of currencies and exchange rates.

  • Traders should download spreadsheets of trades in a regular routine, like weekly if you’re paranoid, but monthly should do just fine.
  • Miners should backup their wallets to protect their valuables, of course, but also need to keep record of their gains. Keep receipts of all your hardware costs, too.

2. Backup your records. Sure we all should do this for all our important stuff, but really, who wants to retrace their steps in case their hard drive fails or some other disaster hits? Do you have backups for your backups?

3. Make sure you can compute the fair market value of your virtual currencies as all reporting to the IRS must be in US Dollars, of course. What was the value of bitcoin in USD at the time you bot and sold it? Did you have to pay fees upon selling or buying and in which currency? What was the fee currency value then?

The Internal Revenue Service hasn’t addressed this crypto quandry since 2014, so we assume their message is the same as posted in IRS Notice 2014-21 .

Don’t be afraid to get started…

Oh, and if you haven’t started with owning any crypto yet it’s time you did. The future is looking rosy!

Get an account at Coinbase and hook up a bank account or credit card and you’ll be able to buy the best loved virtual currencies right from your phone or computer. (That’s my affiliate link so if you sign up and buy $100 of any digital currency we’ll both earn $10 of free bitcoin!)

 

 

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