Bitcoin Investing? Here’s How Taxes Will Affect You

Cyptocurrency mania has taken off. Bitcoin (BTC) and other virtual currencies such as Ethereum (ETH), Litecoin (LTC), and Ripple (XRP) have created newly minted millionaires many times over this past few months. And With these new investments come many questions – importantly, how does the investment affect your taxes? The IRS has just recently shed light on the matter. Bitcoin is the most widely circulated virtual currency. It’s considered a convertible virtual currency because its value is equal to real currency. How you use and hold Bitcoin affects its tax implications. Here’s how.

Mining Bitcoin? You must report it as income.

If you’re someone who ‘mines’ Bitcoin, which is the act of validating transactions and maintaining the public virtual currency ledger, you must include earnings in your gross income. Easy enough right? Actually, you must also ensure that you decipher it’s fair market value on the day it was mined. Additionally, if you are doing so in a self-employed capacity, you are subject to the self-employment tax (minus allowed deductions).

Paid for goods and services? The IRS taxes virtual currency as income.

If you are ahead of the curve and paying your employees in virtual currency, you must report it on W-2s just like standard wages, and withholdings are the same as well. However, just like mining, you must convert the currency into dollar value on the date of each payment.

As an employee, you must report your total wages in dollars. You can do so by converting Bitcoin earnings and adding them to regular dollar wages. If you’re self-employed and have gains/losses from sales transactions these amounts must also be converted and reported.

Held As Capital? The IRS taxes virtual currency as property.

Bitcoin held as a capital asset must be reported as property. Think of this type of Bitcoin relative to property transactions, and the same tax laws apply. If you hold the virtual currency as stocks or bonds, gains and losses are subject to taxes the same way as capital gains and losses.

As these new cryptocurrencies mature with sharp rises in valuation, so does interest. For example, Bitcoin went from $1,000 to $19,000 between January and December, although the price is now hovering around $11,000 at of the time of this publication. Understandably, many Bitcoin and alt currency owners are selling their investments to reap the rewards.

If you are in one of the three situations above, make sure to keep meticulous records of valuation at gain and loss (try setting up an account on CoinTracking), but keep in mind that it’s not as complicated as it might seem. Consult your tax professional to ensure that you are realizing all gains and losses. You’ll need to report correctly and wisely navigate the new terrain virtual currency is blazing.

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