What are the tax implications of investing in Bitcoin and other cyber currencies? (United States Tax Code)
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Investing in cyber currencies can present some real challenges at tax time. Well, that is for the few that actually report it on their tax returns. The IRS reported that in 2015, just over 800 tax returns (out of nearly 250 million returns filed) reported capital gains tax on bitcoin or other cyber currency transactions. That is about .00032% - a smaller ratio than the value of bitcoin to the dollar when the infamous pizza transaction occurred.
As a noob to crypto currency, the temptation to not report is understandable. But, alas, I am a CPA and tax avoidance wouldn’t bode well for my conscience or my license – especially given those darned ethics requirements. So, I will report any gains or losses I may incur and will suffer the tax consequences with grace.
The unfortunate part for those non-reporters is that the IRS has some pretty savvy folks working there and it didn’t take long for them to figure out that if the market cap for cyber currencies hovers around $150 billion, then there are probably more than 800 Americans making money on it.
Ruh Roh, Shaggy. It looks like what happens in the Mystery Van may not stay in the Mystery Van after all, especially given that the IRS has issued John Doe summonses to exchanges like Coinbase demanding they disclose the identities and activities of previously anonymous investors.
So, if you are an honest investor and plan to report gains and losses or if you are an, ahem, previously undisclosed investor looking to go back and amend a few tax returns before Uncle Sam comes knocking on the door with his “interest and penalties” stamp in hand, then I hope to help with a series of blog posts I plan to publish in the coming weeks.
I am open to other topics so feel free to send me suggestions but for now my rough plan is to provide posts related to the following topics.
- How to track gains and losses (even your purchase using Bitcoin at the local store might make you subject to Capital Gains taxes)
- The Cryptocurrency Tax Fairness Act of 2017 and what it means to you.
- Mining – It’s not a hobby, it’s a business!
- Trading your coin in a tax-sheltered, self-directed Roth IRA – (not necessarily as great as it sounds for serious investors but not a bad idea either.)
Nice post! I was just having a discussion with an acquaintance that said he was going to trade on behalf of others and not report the income. I asked him what happens if one of his clients gets busted for some other scheme they are in and flips on you because you've become worth more? Now you have tax and trading violations.
Keep these up. This is definitely something the community needs to be thinking about. Followed.
I would definitely caution him against doing that. He is taking on all of the tax liability if he does their trading in his account. I think the IRS is going to come down hard on people that have not reported this stuff. They used the same techniques to track down foreign bank account that were being used for tax avoidance. At best, he should help his friends set up their accounts and even manage them for them if he wants but the activity occurs under their names so they hold the tax liability.
Makes complete sense. Thanks for the thoughtful post and comments.
Great post. I am new to cryptos so I have not realized any gains yet. When I do realize some gains (fingers crossed!) I will certainly make 100% certain to report all realized gains and losses to the IRS. I've got a pretty good spreadsheet going now to track the cost basis of my coins. Great to know that a CPA is posting here. Will follow you now.
Thank you, Solidus. Following you as well now.