Bitcoin Tax Guide

Just as with any other form of investment, it’s essential to know what your tax obligations are when dealing with Bitcoin.

Although it’s very different from traditional currencies, and it’s possible to make anonymous transactions, these differences don’t mean that it’s exempt from taxes.

So to avoid getting caught off guard when tax season rolls around, it’s a good idea to spend some time learning how taxes work with Bitcoin, and how to avoid any potential legal issues.

It’s important to note, though, that regulations vary greatly by country.

In this article, you can find everything you need to know about correctly filing taxes for Bitcoin in the United States. But if you’re located outside the U.S., you’ll want to take the time to find a resource specific to how your country handles taxing Bitcoin transactions.

Why is crypto more complex than stocks?

If you have experience with trading stocks, you already have a general idea of how taxes work for investments.

Unfortunately, filing taxes for cryptocurrency like Bitcoin is a bit more complicated. That’s because the IRS hasn’t given clear guidance on the best way to handle it.

Like stocks, Bitcoin is technically considered property.

irs bitcoin property 1

Every time you buy it, a “cost basis” is created. Then, when you sell it, a gain or loss is created.

You’ll be taxed every time you buy or sell, as well as every time you make any other type of Bitcoin transaction.

Now, so far this may seem relatively straightforward. But things start getting complicated when you consider the types of transactions involved in cryptocurrency trading.

With traditional stocks, all purchases and sales are made with fiat, or standard forms of currency like USD, EUR, or GBP. This keeps things simple for taxes. All you need to know is each stock’s cost basis and the amount you sold it for.

Then, at the end of the year, your brokerage will create a simple tax document you can use to file.

Cryptocurrencies can be similarly straightforward if you only trade in fiat. But if you choose to trade cryptocurrencies for other cryptocurrencies, like Bitcoin for Litecoin, the process is more complicated.

That’s because each time you make a transaction, you’ll need to calculate and record your gain or loss in fiat for tax purposes.

And because cryptocurrencies are traded in decimals instead of whole number shares, you can easily wind up with multiple transactions for fractions of a Bitcoin — and you’ll need to calculate the fiat equivalent for each one.

That’s because even if you’re trading one form of cryptocurrency for another, you’ll need to report your trades as if you had converted your currency to fiat, then traded it for another form of cryptocurrency.

So if you plan to do any crypto-to-crypto trading, you’ll need to make sure to keep meticulous records for tax purposes.

Without these records, it can be challenging — if not impossible — to file accurate taxes for your investments.

Does Bitcoin exchanges provide taxable income reports?

Another issue that can complicate the process of filing taxes for Bitcoin trades is that many exchanges do not provide taxable income reports.

Once notable exception to this is Coinbase, which provides Form 1099-K to certain business customers and GDAX customers that have earned at least $20,000 through sales of cryptocurrency for at least 200 transactions in a calendar year.

It also provides Form 1099-K to certain customers in Massachusetts and Vermont.

For all other customers, the platform offers a Cost Basis for Taxes report with a summary of virtual currency purchases and sales, as well a report of gains and losses.

coinbase transaction history 3

But most other platforms are far less helpful when it comes to taxes. That’s because individual coin investors are responsible for generating their own accounting and tax reports.

What most coin exchanges do offer, however, is for users to download their account history as a CSV file.

And while translating this information into the appropriate tax forms can be challenging for the average investor, programs like Bitcoin.Tax simplify the process.

After you upload your account history, you’ll be able to access a Capital Gains Report, Income Report, Donation Report, and Closing Report. From here, you can easily calculate your taxes and be confident that you’re filing correctly.

Where to report Bitcoin income

If you’ve included Bitcoin-related transactions in your taxes, you may be wondering where, exactly, you need to report your income.

In most cases, any income for your sales will need to be reported on Schedule D, which is an attachment to Form 1040.

If you held Bitcoin for less than a year before selling, it would be taxed as short-term capital gain. This is taxed at the same rate as standard income.

But if you held it for longer than a year, it will be taxed as a long-term capital gain. This means it you’ll pay lower rates, with the exact rate depending on your income bracket.

How to prepare your Bitcoin tax filing

As with taxes in general, preparing a Bitcoin tax filing can be a tedious process.

Fortunately, there are a few tools you can use to make the process much easier. As mentioned above, Bitcoin.Tax is a helpful tool for producing various downloads for capital gains.

Another option to consider is CoinTracking.Info.

cointracking info 1

This software also produces U.S. compliant tax reports like Capital Gains and Losses, Other Income Reports, Gift and Donation Reports, Lost and Stolen Reports, and Closing Position.

These reports can be exported into standard tax forms like Form 8949, Statement for the IRS, TaxACT, and TurboTax.

According to founder and CEO Dario Kachel, it’s also the only service with current and historical prices for all 4,878 coins on the market.

This makes it easy to analyze your trades and generate simple, tax-compliant reports for all of them — drastically cutting down the time it will take to file accurate taxes for your Bitcoin trades.

Ways to minimize Bitcoin taxes

Paying taxes on any form of income is necessary — but if you’re like most people, you’ll be looking for ways to minimize the amount you have to pay.

1. Use Last-In-First-Out (LIFO) or First-In-First-Out (FIFO) to improve your Bitcoin capital gains

When it comes to stocks, bonds, and mutual funds, you have the option to record transactions on a “first in, first out” (FIFO) basis, “last in, first out” (LIFO) basis, or a “specific identification” basis.

Many people opt to apply the same rules to cryptocurrency.

2. Optimal ratio for long-term vs. short-term capital gains

Considering how drastically the tax rate can vary between short-term and long-term capital gains, it’s important to consider the role they play in your investment strategy.

While short-term capital gains are taxed at the same rate as standard income, you can benefit from a reduced tax rate for any assets you hold for longer than a year.

3. Donate your bitcoins to charity

If you want to donate to a charitable organization, donating in Bitcoin can be a great way to save on taxes.

While selling Bitcoin, then donating it will involve taxes during the selling process, donating directly eliminates those taxes.

This way, your tax deduction will be equal to the fair market value of the Bitcoin — and because you won’t be paying capital gains taxes, the charity will receive your contribution’s full, pre-tax value.

4. Buy Bitcoins in your IRA

Beyond standard investments, you may also want to consider investing in Bitcoin for your retirement fund.

If you decide to take this route, you’ll need to have a self-directed IRA. These IRAs allow for diversifying retirement assets beyond traditional stocks, bonds, mutual funds, and certificates of deposit.

Once you’ve opened a self-directed account, you can complete an allocation order for Bitcoins. Then, much like with standard IRAs, you will not be able to access these funds until you are 59.5 years old.

5. Buy Bitcoins as a resident of Puerto Rico

If you’re a resident of Puerto Rico, Bitcoin could be an excellent investment. That’s because as of now, residents can sell cryptocurrency tax-free.

This means that at the moment, some investors are considering Puerto Rican a haven for Bitcoin trading.

That being said, there’s reason to believe that the IRS will soon take steps to tax these sales. Under the current system, they’re missing out on billions of dollars in taxes — and it’s unlikely that they’ll allow this to continue for much longer.

Conclusion

One of the minor disadvantages of working with Bitcoin is that paying taxes is slightly more complex than with standard currencies.

Fortunately, this is getting slightly easier now that some Bitcoin exchanges are beginning to provide tax reports — and will hopefully become even more straightforward as governments continue to develop their own guidelines and regulations.

But if you’re still concerned about your responsibilities, you can take a look at our Bitcoin Legal Guide to make sure you’re in the clear.