So you’ve made a killing on Bitcoin this year? Time to celebrate… and pay taxes. I’m interested in the greater debate on the staying power of crypto currency, but this is not the post for that debate. Some people count down until Christmas. We are winding down 2017 and the count down for Bitcoin and crypto traders should be “tax season.”
The IRS treats digital currencies, like Bitcoin, as property. This means that traditional property rules are applied under the IRS. We’ll talk specifically about the investment side of digital currency investments. You should note that this is also applicable for goods and services – both paid and compensated – in the virtual currency space. It is the taxpayer’s responsibility to report capital gains and losses.
This means that the property is taxed as a capital asset. The IRS defines a capital asset as property held by the taxpayer, weather or not it’s it’s connected with taxpayer’s trade or business. As a result you have to report any capital gains or losses to the IRS. Let’s dive into that now.
What is a capital gain?
A capital gain is the profit that you receive when you sell the property. There are two types of capital gains – long term and short term. Short term capital gains are defined as property held less than 12 months. Long term capital gains are defined as property held longer than 12 months.
Taxation of Long Term and Short Term Gains?
Short term capital gains are treated as ordinary income for the purposes of taxation. Long term capital gains are taxed at either 0%, 15% or 20% for 2017 – depending on your income level.
What if I lost money?
If you lost money… you’re not trading cyrpto currency correctly in 2017. Bitcoin is up (as of writing this) over 2,000%. However if you have a capital loss the IRS allows you to to deduct this from your income – with limitations. First, losses are used to offset any capital gains. Short-term losses are used against short-term gains and long term losses against long term gains. Let’s look at an example:
If you have $2,000 of short-term loss and $1,000 of short term gain – your net is a $1,000 short-term loss. You can deduct this $1,000 from your income. Note that you can only deduct a certain amount of capital loss ($3,000 for 2017). IF you have losses greater than the limit – you can carry those forward to future tax years. This can be used to offset gains as well as income up to the limits.
Obviously, you NEED to discuss your specifics with a tax professional – CPA or tax advisor.
Check with your current crypto exchange for details on their reporting tools and documents. You do not want to find out the hard way that you owe additional taxes to Uncle Sam. Currently, Coinbase does not issue 1099 reporting documents. Some helpful links below:
Coinbase reporting tool
IRS Guidelines on virtual currency
IRS FAQ digital currency miners and traders
IRS 409 – capital gains and losses
I’m not a crypto hater. I do not believe, currently, that investment into the digital currency space is appropriate for most investors. This space does not have the backing of central banks, government oversight and the checks and balances need to facilitate a fair market. The SEC released some FAQs and thoughts on the cryptos – read and review it thoroughly.
The rapid rise and decline of value within these currencies can wreak havoc on ones financial future. Bubbles can happen in many asset classes and have certainly done significant harm to individual and global economies alike – see 1999 dot com bubble and 2008 Financial Crisis. Manage your investments with caution and use common sense – a 40% increase in a 24 hour period is not sustainable. Proceed with caution.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions for a full disclaimer.