Bitcoin and taxes

Tax season can be quite confusing with complicated rules about what types of income are taxable and which are not; what can and cannot be canceled; and which assets need to be listed and which ones don’t. Add to that the confusion surrounding digital currency and its status in the eyes of governments, inevitably there are doubts about Bitcoin’s relationship to taxes.

In the United States, for example, “taxable income” encompasses everything that is received as payment for goods and services. There is no reason for this to exclude payment in bitcoin. Bitcoin received from someone else on the exchange counts as gross income, which is subject to income tax. Bitcoin coins obtained through trading or a bitcoin exchange could fall into the category of “capital gains”, like gold, and will be subject to tax. The Bitcoins that are mined are counted as income received from the act of mining and are subject to taxes, with accrued expenses (such as computing power) being deductible. When miners sell their bitcoins, they are taxed for any increase in the value of the bitcoins between the time they were mined and the time they were sold.

The US Internal Revenue Service wrote a 2014 note on “virtual currency” that offers some guidance on its view of bitcoin as capital assets that are taxable. However, users will have to examine the tax requirements for whatever country they are paying taxes in and determine how their home countries classify cryptocurrencies as bitcoin.

To prepare for tax season, it is important for bitcoin holders to take note of how much the digital asset is worth relative to their local fiat currency. It is also advised to keep a detailed Bitcoin expense report and record the value of bitcoin when it was spent, in case any of these expenses can be canceled.

Hiring an experienced accountant is a great way to make sure your Bitcoin-related tax returns are accurate. There are several services to help users figure out how to pay their Bitcoin taxes, including CoinReporting and Bitcoin Taxes.

Although no one promises it will be fun, accurately recording and reporting Bitcoin earnings is a crucial aspect of the digital money economy.