What does the IRS think of cryptocurrency? If you’re dabbling with Bitcoin and other virtual currencies, you need to know the Internal Revenue Service’s stance on things. Do you pay taxes on Bitcoin and other virtual currencies? Absolutely! Skirting the use of actual dollars doesn’t mean skirting the tax obligations that go along with using actual dollars.
While cryptocurrency tax laws are still emerging, the one thing that’s as clear as day is that the responsibility falls on the crypto user to calculate, track, and pay all taxes owed. Take a look at the basics of virtual currency tax rules to avoid IRS penalties and interest.
Do You Pay Taxes on Bitcoin? Some Crypto Tax Basics
Any cryptocurrency units that you purchase, sell, or mine are considered taxable as property by the IRS. As a result, you should view cryptocurrency that you own more like stocks or a vacation home than currency. That means being aware of capital gains and losses when you move your cryptocurrency. However, there is a caveat to that rule that makes understanding how to report cryptocurrency on taxes confusing. The IRS does view cryptocurrency as income if you are paid in cryptocurrency by an employer.
Here’s a rundown on some of the big things to know about cryptocurrency and your taxes:
- There isn’t a separate “cryptocurrency tax rate.” Crypto fair market value is converted to dollars for tax purposes.
- Cryptocurrency is generally treated as property.
- All property-transaction taxes apply to crypto transactions.
- Wages paid in cryptocurrency are taxed as regular income.
- Self-employment income paid in cryptocurrency is taxed as regular self-employment income.
- If you pay for services using cryptocurrency that you’re holding as a capital asset, you must report a capital gain or loss because you are exchanging an asset for a service.
- Cryptocurrency received as a gift will not become recognized income until you sell, exchange, or dispose of it.
- Cryptocurrency paid to charitable organizations will qualify for the charitable deduction contribution. Generally, the deduction amount is equal to the fair market value of the currency at the time of your donation.
You must report any sales or capital transactions involving cryptocurrency throughout the year. Typically, you will be reporting capital gains and losses using Form 8949: Sales and Other Dispositions of Capital Assets. You will also be responsible for detailing gains and losses using Form 1040/Schedule D: Capital Gains and Losses.
In anticipation of taxes, you should be keeping impeccable records and documentation regarding all sales, exchanges, and disposition of cryptocurrency. It is especially important to document the fair market value of all currencies at the times of your transactions.
Bitcoin as Wages: How Is Bitcoin Taxed When an Employer Pays Me in Cryptocurrency?
If your employer pays you using Bitcoin or another virtual currency, you’ll need to report that income the same way you’d report any income you’ve earned.
The good news is that your employer will be the one doing most of the hard work in regards to converting Bitcoin to dollars on your W-2 form. That means that you’ll see the Bitcoin value that you were paid converted to U.S. dollars on your form. Throughout the year, your Bitcoin salary will also be subject to the same withholding amounts for Social Security and Medicare as regular wages based on the converted dollar value.
Be Prepared for Extra Work When Keeping Track of the Cryptocurrency Tax Rate
When you do business using cryptocurrency, the IRS expects you to keep track of fluctuating values to accurately fulfill your tax obligations. This is especially critical if you do a lot of Bitcoin mining, selling, or trading. Here’s what you’re responsible for:
- Recording the fair market value of the Bitcoin when you mined or purchased it.
- Records of the fair market value of your Bitcoin when you used it.
- Records of the fair market value of your Bitcoin when you sold it.
While you’re being held to the same tax standards as people purchasing and selling stocks, you may not be getting the same paper trail that stock buyers are getting. Someone working with a broker would rely on a Form 1009-B or Form 1099-K at the end of the year to report transactions for tax purposes. With Bitcoin tax, you’re generally on your own when it comes to keeping records.
In most cases, third-party crypto networks are only required to send tax forms to customers who ordered more than $20,000 in cryptocurrency and made at least 200 transactions. Five states (Arkansas, Massachusetts, New Jersey, Vermont, and the District of Columbia) have even lower thresholds ranging from $600 to $2,500. However, you’re still responsible for reporting your crypto gains on your taxes even if you didn’t hit the $200,000 or 200-transactions thresholds. This is where a lot of people run into trouble; they assume that not receiving tax forms means that they don’t have to report cryptocurrency on taxes.
While crypto networks are supposed to send you the right forms once you hit certain thresholds, the bottom line is that you’re ultimately responsible for reporting all crypto gains. It’s wise to keep your own perfectly organized records regarding all transactions even if you think you’ll be getting a form. Your transaction history on the crypto platform you use can also be helpful for keeping your own records.
What About Capital Losses on Bitcoin and Other Virtual Currencies?
You can take advantage of many of the usual tax deductions if you access tax preparation services. The IRS does allow cryptocurrency users to deduct capital losses. The process works essentially the same as deducting capital losses for any stocks or bonds you’d own. Under current rules, you are permitted to write off cryptocurrency losses of more than $3,000. The volatile nature of cryptocurrency makes this an especially appealing tax perk for crypto users and traders. What’s more, your losses may help counteract any capital gains owed from your crypto endeavors.
How Is Bitcoin Taxed? Getting Answers From Tax Professionals
If you’ll be filing taxes that include Bitcoin and crypto payments, your return is going to be very interesting to the IRS. While any mistakes you make may be honest ones stemming from the newness and uncertainty of how to pay taxes on Bitcoin, the IRS will still hold you to the same standards as all other taxpayers when it comes to accurately and honestly filing and paying your taxes. Make sure you’re using tax help resources to ensure that you’re not putting yourself at risk for audits or penalties. At Tax Group Center, we use our 30 years of experience with the IRS to help today’s generation of crypto users enjoy the same steadfast tax support as people filing returns with typical wages and investments. If you have questions about virtual currency tax laws, contact us today.