How Are Gains or Losses on Cryptocurrencies Taxed?

How are cryptocurrency transactions taxed? How are the IRS and other taxing authorities planning to address Bitcoin taxes?

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Yes, the IRS gets a cut. Bitcoin and other cryptocurrencies may exist in a “virtual” world, but as far as the Internal Revenue Service is concerned, they’re very much “real” property, which means that for anyone trading, investing, or otherwise involved in this arena, it’s important to understand cryptocurrency taxes.

Back in March 2014, the IRS said as much when it issued initial guidance on U.S. federal tax implications for transactions in, or transactions that use, virtual currency. The IRS noted that in some environments, virtual currency functions like “real” currency, similar to the U.S. dollar or other legal tender (even if it doesn’t have legal tender status).

Cryptocurrencies have only grown since then. In December, the total market value of all cryptocurrencies worldwide reached $600 billion, according to CryptoCurrency Facts. If you’re a U.S. taxpayer, the federal government should get its cut of any profit from buying and selling cryptocurrencies, payments accepted in cryptocurrencies, and certain other transactions.

“The main thing to remember is how you’re using it,” Lisa Greene-Lewis, a CPA and editor of the Intuit TurboTax Blog, says of cryptocurrencies. The market is “evolving fast” and there are many things investors must get a handle on in the crypto world, but a good place to start is to “make sure you claim your transactions.”

Although TD Ameritrade does not offer direct trading in cryptocurrencies, Greene-Lewis offered answers to a few basic cryptocurrency taxation questions.

I made a profit investing in, or buying and selling, cryptocurrencies in 2017—now what? Do I have to pay Bitcoin taxes?

The IRS views cryptocurrencies in a similar light as more traditional assets, like stocks and real estate, meaning gains in many cases are subject to capital gains taxes, Greene-Lewis says. “The IRS considers it property, so when it’s sold, it goes on same forms,” she says.

The IRS views cryptocurrencies in a similar light as more traditional assets, like stocks and real estate.

How cryptocurrencies, as a capital asset, are taxed depends in part on the “character” of any gains or losses, according to the IRS.

“Long-term” gains (from holding an investment longer than a year) would be taxed at 20%, 15%, or zero (under new U.S. tax law), depending on an individual’s tax bracket. For “short-term” gains (less than a year), a short-term capital gains tax is applied, equal to the ordinary income tax rate for the individual.

What if I had cryptocurrency losses? How do I handle those?

Again, the IRS applies the same kind of treatment it does to stocks, Greene-Lewis says. That means you could offset any capital gains taxes on investment gains with any losses from cryptocurrencies—you’d report it as a “personal” loss.

I started trading futures on Bitcoin. How do I handle those taxes?

If you trade Bitcoin futures, you'll want to familiarize yourself with Section 1256 of the IRS tax code. Under Section 1256, futures contracts are treated with “mark to market” status, meaning, even if you didn’t liquidate a position by the last trading day of the year, the IRS treats it as if you did, and uses the closing price of that final trading day to figure your unrealized gain or loss. The closing price is “marked” and used as the cost basis going forward. For more on traders and taxes, including a special capital gains tax treatment, refer to this article.

What if I was paid in Bitcoin, or used Bitcoin to buy goods or services? Is Bitcoin taxable in such a case?

Wages paid in virtual currency are subject to withholding taxes to the same extent as dollar wages, Greene-Lewis says. Employees must report their total W-2 wages in dollars, including anything earned in cryptocurrencies (independent contractors and the self-employed would report this on their 1099s).

When investing in or using cryptocurrencies, keep meticulous records and watch for taxable events—transactions that could trigger capital gains or losses.

Bitcoin or other cryptocurrencies used to pay for goods and services is taxed as income, Intuit TurboTax notes. Self-employed individuals with Bitcoin gains or losses from sales transactions must convert the currency to dollars as of the date it was received for goods or services, and report the figures on their tax returns.

Other tips on Bitcoin and taxes: keep meticulous records and watch for “taxable events,” or transactions that could trigger capital gains or losses (spending cryptocurrencies falls into this basket, as does converting a cryptocurrency into dollars).

Is there a distinction between “mining” cryptocurrencies versus buying and selling? What about initial coin offerings (ICOs)?

If you’ve managed to “mine” Bitcoin—in effect, digging it up by solving a series of complex computations based in the public ledger known as the blockchain—congratulations. Also, know that you must report receipt of this virtual currency as income.

Mining cryptocurrency creates earnings, which must be included in gross income after determining the fair market dollar value of the virtual currency as of the day it was received, Greene-Lewis says. If a Bitcoin miner is self-employed, their gross earnings minus allowable tax deductions are also subject to the self-employment tax.

Mining cryptocurrency creates earnings, which must be included in gross income after determining the fair market dollar value.

Simply put: “If you mine it successfully, then it’s taxable,” she says. “If you hold onto it, then sell it, you would have another taxable event, just like stock.”

As for ICOs (initial coin offerings), the IRS’s view is similar to virtual currencies generally. ICOs produce ordinary income for both individuals and businesses that is taxable.

Cryptocurrencies, like many financial vehicles today, are changing rapidly and can carry different implications for individual taxpayers, Greene-Lewis notes. It’s prudent to consult with a tax professional. 

TD Ameritrade does not provide tax advice. You should consult with a tax professional regarding your specific circumstances.

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