When Bitcoin was first announced to the world 8 years ago, no one expected that the concept of cryptocurrency would experience the vast growth in value that it has. In December this year, bitcoin recorded a historical high of $19,843. But good things never last. The fortunate Bitcoin miners and investors who managed to make small fortunes in the Bitcoin revolution will now be taxed on a portion of their profit by the Internal Revenue Service.
From 2013 to 2015, only 900 people reported their bitcoin profits to the IRS. However, approximately 14,000 users of Coinbase either sold, bought, received or sent $20,000 worth of this digital currency during that period.
The IRS has begun requiring Americans to report their Bitcoin earnings to avoid any need for an audit. However, it is virtually impossible to keep track of all Bitcoin transactions around the country due to blockchain technology being a digitized, decentralized, public ledger of all cryptocurrency transactions. While the IRS faces this problem, Bitcoin owners may postpone reporting their digital currency incomes on their returns.
Bitcoin is a digital currency (or e-currency) which individuals can use to buy goods or convert to physical dollars (or other currencies) due to it having an equivalent value in monetary markets. Thus the IRS has begun to require individuals in possession of bitcoins to report their, potentially taxable, bitcoin gains.
How to Report Your Bitcoin Earnings
Generally, e-currency gains may be taxed either as income or property. People who mine bitcoins must also report the amount they’ve earned when accounting for their gross income.
Bitcoin Earnings Taxed as Income
All employers paying salaries in bitcoins must report their employees’ earnings on their IRS W-2 Forms. The process includes converting the bitcoin value to U.S. dollars, calculating the bitcoin amount according to the dollar conversion rate as of the date the payment was made. Both bitcoin and dollar wages are equally subject to tax withholding. Even if an employee is paid in bitcoins, they must report their total income in U.S. dollars.
Additionally, all bitcoin sales transactions made by self-employed individuals must be converted to dollars and reported to the IRS. See the instructions for filing IRS Form W-2 to make the process of reporting your digital currency gains easier.
Bitcoin Earnings Taxed as Property
For tax purposes, bitcoins may also be treated as property. If an individual holds bitcoins as property assets, they may also be subject to tax withholding. Capital assets such as stocks or bonds and any loss or gain from the exchange or sale of the property is categorized as taxable property.
If you’ve determined that your bitcoins are taxable property, file IRS Form 8949, officially known as the Sales and Other Dispositions of Capital Assets form. For more information about this form and instructions on how to fill it out, go here.
Reporting Earnings from Mined Bitcoins
According to the IRS, all bitcoin miners, including self-employed individuals who’re using their computers to validate all transactions and keep records, must report their earnings as part of their gross income.
In Notice 2014-21, the Internal Revenue Service answers a number of questions that concern bitcoin miners and investors.
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