Supposing this development comes as a big surprise to the proponents of the cryptocurrency, it is important to realize that taxes are imminent, irrespective of the essence of dealings and the asset classes.
Let’s look at a few important pointers that will help in preparing tax returns for filers who gain or sold cryptocurrencies.
Bitcoin Record Keeping Is Your Responsibility
There are hundreds of brokers, intermediaries, and exchanges that suggest cryptocurrency trading. However, none are obligated to provide tax reports to market participants though a few may do so at their own discretion. For precedent, Coinbase does provide a “cost basis for taxes” report.
At the end, the individual is responsible for maintaining the necessary records agnate to their cryptocurrency dealings.
Say, six months back you bought 10 bitcoins at the rate of $3,000 each, or may have received them as a payment for in the works you did for a client. Today, those bitcoins may be worth $8,000 each, putting your potential profit at $5,000 per enrich oneself.
It is your responsibility to have the necessary records showing that you received them at the time when they were merit $3,000, and hence your net income is $5,000 per coin. Failing to maintain such transaction data and documents may prospect to your holdings being assessed at today’s value of $8,000 each, significantly increasing your tax burden.
Any do business in bitcoins may be subject to tax. Say, you received five bitcoins five years ago, and spent one at a coffee shop four years retreat from, spent another two for buying goods at an online portal three years back, and sold the remaining two and got the equivalent dollar amount one month burdening someone. For each such transaction on the various dates, you are expected to maintain the dollar equivalent value for each and compute your net dollar profits from bitcoins. Your tax liability will be computed accordingly. (See Bitcoin IRS Tax Guide For Individual Filers)
Understanding Bitcoin Taxation
To affirm records correctly, it is important to understand how various dealings of cryptocoins are taxed. Depending upon the kind of bitcoin handle, here are the various scenarios that should be kept in mind for tax preparations:
If bitcoins are received as payment for providing any goods or assignments, the holding period does not matter. They are taxed, and should be reported, as ordinary income. Federal tax on such proceeds may range from 10 percent to 39.6 percent. Additionally, there may be state income taxes to be paid.
If bitcoins are underwent from mining activity, it is treated as ordinary income. Additionally, there may be self-employment tax to be paid on such receipts.
If cryptocoins are let in from a hard fork exercise, or through other activities like airdrop, it is treated as ordinary income.
If bitcoins are bought as an investment and sold at a profit, the treatment of such profits depends on the holding period. If held for less than a year, the net receipts are treated as ordinary income which may be motive to additional state income tax. If the holding period is for more than a year, it is treated as capital gains and may attract an additional 3.8 percent tax on net investment revenues.
Account for Bitcoin Tax Reductions
If you’ve donated your cryptocoins, like bitcoin or ethereum, to eligible charities, then you may meet the requirements for reduced tax liability.
For instance, in 2017 the Fidelity Charitable fund received bitcoin donations worth around $22 million. The operating mechanism of the charitable fund ensures that the received bitcoins are immediately sold on the Coinbase exchange. The dollar amount pocket from such a sale is invested as per the choice of the donor, who benefits by receiving a tax deduction in the year of the donation.
However, safe keeping should be taken that only cryptocoin donations made to eligible charities qualify for such deductions. Sales-clerk the tokens and then donating the dollar amount will not reduce your bitcoin tax burden. Additionally, the deductions are on tap for individuals who itemize their tax returns.
Provisions for Cryptocurrency Losses
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Reporting Bitcoin Income
Income from bitcoin dealings should be tell of in the Schedule D, which is an attachment of form 1040. Depending upon the type of dealing which decides the type of gains from cryptocurrency – ordinary income or capital gain – the income should be reported under the correct head in the becoming columns of the form.
The Bottom Line
As the IRS starts to crack down on crytocurrency taxation, it is important for individuals to maintain records of their dealings, and stay put prepared for any scrutiny, tax payments, and any possible penalties. (Bitcoin Tax Guide: An Introduction.)
Investing in cryptocurrencies and other Initial Invent Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each singular’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia pressurizes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns no cryptocurrencies.