Editor’s Note: The focus of this section is to discuss the fiscal responsibilities one could expect when investing in Bitcoin and similar cryptocurrencies.
Bitcoin Tax 101
In published guidance, the IRS has clearly stated that convertible virtual currencies, such as Bitcoin, are treated as property for tax purposes, and should not be treated as foreign currency.
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Virtual currency will be subject to the same general tax rules as all other property regarding when it should be included in gross income, the character of gain or loss, the basis of the property, etc.
Read on as we explore Bitcoin tax and the fiscal hurdles associated with investing in this new type of currency.
How to Invest in Bitcoin
One of the most common uses of Bitcoin includes purchase for investment purposes. If a taxpayer purchases Bitcoin for investment purposes, the tax treatment is similar to buying and selling stock.
The taxpayer’s basis in the virtual currency is the adjusted basis (the cost basis + commissions + other purchase fees).
Bitcoin Tax Forms
The sale or exchange of the purchased Bitcoin, held as an investment, causes the taxpayer to recognize a capital gain or loss. Individuals report capital gain or loss from the sale of bitcoin on Form 8949 and Schedule D.
John bought one bitcoin for $800 on January 14, 2019, and paid a $10 purchase fee. Thus, John’s basis in the bitcoin is $810.
On April 1, 2020, John sold the bitcoin for $1,100. John recognizes a long-term capital gain of $290 – this is the difference between his adjusted basis in the bitcoin and the amount he realized from the sale. The gain here is long term because John held the bitcoin for more than one year.
He reports the transaction on Form 8949 and carries the total of his long-term capital gain or loss from all transactions to Schedule D.
Bitcoin and Capital Gains and Losses
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In determining if you have a short-term or long-term capital gain or loss, you need to look at something called the holding period. If the holding period is one year or less, then you have a short-term capital gain or loss. If the holding period is more than one year, then you have a long-term capital gain or loss.
Your holding period begins on the day after you purchase the Bitcoin and ends on the day the Bitcoin is sold or exchanged.
Decoding Bitcoin Stock Bitcoin Stock Value
Although buying and selling Bitcoin for investment purposes is similar in nature to the buying and selling of stocks, Bitcoin is not a stock or security any more than it is a foreign currency. Thus, the sales transactions will not be reported to the IRS and to the taxpayer on Form 1099-B. However, if you received at least $20,000 of cash from selling Bitcoin that is related to at least 200 transactions, you may receive a Form 1099-K.
Furthermore, the sale of Bitcoin is not subject to the same anti-abuse rules as stock, such as the wash sale rules under §1091, which prevent a taxpayer from recognizing a loss on the sale of stock or securities if he or she purchases substantially identical stock or securities within 30 days before or after the sale.
Because those who purchase Bitcoin may not receive information documents, it is especially important that taxpayers who invest in Bitcoin maintain a detailed record of their virtual currency transactions in order to ensure that they properly report the gain or loss on their income tax returns.
Bitcoin Income Next Steps & Where to Go for More Crypto Tax Tips
If you find yourself wondering about other crypto tax tips, meet with your local H&R Block tax pro.
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