Bitcoin use comes with many benefits that give it an advantage over using localized currency. Cheap and quick transactions, no paperwork, and appreciating value are just a few. With Bitcoin use constantly increasing among individuals and merchants, it’s important for all taxpayers to be aware of how Bitcoin is taxed. The IRS has begun closely monitoring cryptocurrencies and has imposed many new regulations with which users must comply. Figuring out how to characterize Bitcoin income, capital gains and losses, as well as mining compensation can be overwhelming.
Fortunately for California taxpayers, the Roseville tax lawyers of NewPoint Law Group have the experience and knowledge to answer all of your Bitcoin-related questions and provide useful tips for tax compliance. Our attorneys deliver skilled representation and effective guidance to all types of taxpayers. To discuss whether your activities with Bitcoin have created taxable events or tax reporting obligations, call 1-800-358-0305 today or contact our firm online.
Bitcoin Used to Pay for Goods and Services Are Taxed as Income
For the purposes of IRS compliance, if you are paid in cryptocurrency, you are paid in dollars. Wages paid to employees using virtual currency are taxable to the employee, and must be reported by an employer on a Form W-2, all of which are subject to federal income tax withholding and payroll taxes. Those who are self-employed or work as consultants still need to report the fair value of the coins as income.
If you were tipped, as long as it was not for any provided product or service, then it is gift and not due taxes. If you were given the cost basis along with those tips, you can use this information to reduce any gains when you come to sell them. However, you are not permitted to declare losses from the basis of these coins. You must instead use the fair market value.
Bitcoins Held as Capital Assets Are Taxed as Property
According to IRS guidelines, the character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer. If you hold Bitcoin as as a capital asset, then general tax principles applicable to property transactions will apply. If the Bitcoin is held in the form of stocks or bonds, any gain or loss from the sale or exchange of the asset is taxed as a capital gain or loss. Otherwise, the investor realizes ordinary gain or loss on an exchange.
When you are trading Bitcoins or digital currencies on an exchange, each sell order must be included in your capital gains calculations, even if you never withdrew the dollars to your own bank account. If you received USD, another foreign currency, or even another digital currency, you have potential capital gains/losses, including any trading to other digital currencies.
Bitcoin Miners Must Report Receipt of the Virtual Currency as Income
Since Bitcoins are currently traded in various online marketplaces, a person who receives a Bitcoin can reasonably calculate its value in the local currency. Therefore, it is possible the IRS treats the receipt of a Bitcoin through a mining pool, or from an individual mining operation, as a taxable event. The IRS stipulates in its guidelines that after determining the fair market dollar value of the Bitcoin up to the day of receipt, the earner of the mining income must include the amount in their gross income. If a Bitcoin miner is self-employed, his or her gross earnings minus allowable tax deductions are also subject to the self-employment tax.
Know How to Label Stolen or Lost Cryptocurrencies
The proper way to label lost or stolen cryptocurrencies presents a big problem for taxpayers. It would be nice to think that these events are exempt from taxation guidelines; unfortunately, that’s not the case. In fact, they may even lead to unfavorable tax treatment in the long term. Whether the Bitcoin funds are lost due to user error or illegal activity by a third party, the user remains responsible for reporting the income. The IRS will likely want proof if the amount deducted is large, though you can still write off the loss on your federal return. The options for writing off the loss may change depending on whether the Bitcoin was lost or stolen.
Keep Records of Your Bitcoin Activity
The IRS has made its expectations clear regarding taxpayers’ obligations to keep fastidious records of their Bitcoin activity. Failing to keep accurate records can create many problems when it comes time to report. For instance, if an exchange you were using suddenly disappeared and you can no longer obtain your records, you might have difficulty proving any gains from any trades. Those long-term gains might be changed to short-term. To prevent these issues, it’s a good idea to keep careful records, periodically download your trading history, export transaction logs from your Bitcoin wallets, and make sure you have records for each time you spend Bitcoins.
Contact an Experienced Roseville Tax Attorney Today
Bitcoin and other new cryptocurrency technologies come with many complexities that are best explained by a knowledgeable California tax attorney. NewPoint Law Group has the experience and skill to handle all your tax levy and estate planning needs. To discuss whether your activities with Bitcoin have created taxable events or tax reporting obligations, call 1-800-358-0305 today or contact our firm online.