Could You Owe Taxes For Owning Bitcoins?

The IRS has come out with rules on the taxability of bitcoins- and the rulings disappoint many. Bitcoins are treated tax-wise more like a stock, subject to short and long term capital gains, rather than with currency trading in general where no tax event that takes place. However, if you mined or traded bitcoins and have not paid taxes on these transactions there may be penalty relief available to you for voluntarily reporting this income.

Questions About Taxes on Bitcoins

Why Are Bitcoins Suddenly Taxable?

As Bitcoins are not issued by any government they have run without government scrutiny for a number of years, but this does not mean that transactions in Bitcoin were not taxable. U.S. citizens are subject to tax on income from all worldwide sources, this includes Bitcoins.

Why Are Bitcoins Not Treated Like Other Currency?

With the recent popularity of Bitcoin, the IRS had to determine rules for its taxation. As Bitcoin is not issued by any government it does not fall under their definition of currency so they have decided to treat it how a stock would be treated. In the future I imagine this will be challenged and may be redetermined, but how it is now, nearly all transactions in Bitcoin are subject to capital gains tax.

How Is Tax Figured On My Bitcoins?

Let us use an example: Say you sold $500 worth of Bitcoin that you purchased for $300, the $200 difference is the taxable amount. If you owned the Bitcoin for at least a year it is considered a long-term capital gain, taxed at a rate that ranges from 0% to 25% depending on your tax bracket, or how much total income you earned in a year. If you owned the Bitcoin for less than a year the difference is taxed as short term capital gains, at your normal income tax rate.

What About If My Bitcoins Lost Money?

The big advantage of this new ruling is that if you have lost money trading in Bitcoin the losses are deductible against other income. Losses in other currency trades are not.

How Does the Treatment of Bitcoins Differ From Other Currency?

Trading in other currency, for example Euros to Dollars, is not taxable and there is no filing or reporting necessary. Trading in Bitcoins though is treated more like owning stocks or real estate, where the gain or loss is considered an investment.

What about if I get paid in Bitcoins?

As some employers have started paying salaries in Bitcoins this becomes increasingly complex. The pay you receive in Bitcoin is taxed as income at the rate of exchange on the date the payment was received. Then if you keep the funds in bitcoin and later use them to buy goods or services, any gain or loss on the Bitcoin for the conversion rate on the date you used them is considered a capital gain subject to tax, or a deductible loss.

How Do I Determine the Conversion Rate?

As there is no average conversion rates listed by the IRS or Treasury Department at this time, the IRS has left this up to the discretion of the taxpayer to use any rate within reason, as long as it is consistantly applied.

These Rules Just Came Out, Do I Owe Tax For Bitcoins Over Past Years?

Yes, these rules must be applied retroactively, and the IRS can audit up to seven years in the past. There is amnesty available right now to not pay penalties such as the late filing and underreporting income penalties that can add up to 50% of the tax liability due easily. For more information on this amnesty please contact us.

1 (888) 547-4614

© 2016 – tax savings are just a click away