You can STOP right here, if you prefer to use a tax professional to prepare your taxes, but consider TEXTing me (at the above number, to get the contact information for the BEST Crypto-Tax Attorney in the LAND [at this point]). Especially, if you know your current CPA is barely pulling his weight in fiat tax preparation or isn't an EXPERT in cryptocurrencies.
[I would put the attorney's number here, but I don't want his office receiving random calls from bots, telemarketers or pranks because I posted his number in my blog. I will let that be from his own exposure.]
Now, back to the general explanation for what to expect regarding taxation in the US:
In Rev. Rul. 2014-21, the IRS ruled that “virtual currencies” are classified as “property” for federal income tax purposes. This means that bitcoin is subject to the general principals of taxation that apply to all types of property. There are no special rules or treatment for virtual currency.
As property, bitcoin qualifies as a “capital asset” in the hands of most taxpayers. An important exception is if the bitcoin is held as inventory for sale in the taxpayer’s trade or business (see Section 1221 of the Internal Revenue Code for a list of the other exceptions). As long as such an exception does not apply, any gain or loss realized upon exchange of bitcoin is “capital” in nature and eligible for the preferred long-term capital gains.
Lastly, here are a few things that bitcoin is NOT (at least for Federal income tax purposes):
Foreign Currency
Share of Stock or a Security
Commodity
As a consequence of bitcoin’s classification as “property,” every exchange of bitcoin is a taxable transaction. This includes exchanges of bitcoin for cash, for goods/services, and even for other altcoins.
It is irrelevant whether or not the transaction involved fiat. If an exchange occurred, and as a result of that exchange the taxpayer gave up bitcoin and received something other than bitcoin in return, then a taxable transaction has occurred.
Therefore, US taxpayers must calculate the amount of their gain or loss on every single transaction involving bitcoin. This is highly burdensome and threatens the widespread adoption of bitcoin (or virtual currency in general) as a viable medium of exchange.
Gains are calculated by taking the “amount realized” in each transaction and subtracting the “cost basis” of the bitcoins given up. If the amount realized was greater than the cost basis, there is a gain. If it was not, then there is a loss. The total amount of gains and losses are then netted against each other to determine the net gain or loss for the year.
In Rev. Ruling 2014-12, the IRS confirmed that bitcoin mining is a taxable activity. Specifically, bitcoin miners have taxable income at the time they successfully mine a bitcoin. The amount of this income is equal to the market price of the mined bitcoin. This will also be the miner’s cost basis in the mined bitcoin if it is ever sold in the future.
The method of reporting income from bitcoin mining will depend on whether the mining activity rises to the level of a “trade or business” or is merely a “hobby.”
If a mining activity qualifies as a trade or business, then the income and expenses are reported on Schedule C. According to the IRS, a trade or business is an activity engaged in for profit, which the taxpayer conducts on a regular, continuous, and substantial basis. This is a highly factual test and the results will vary depending on the unique factors of each situation.
If a mining activity does not qualify as a trade or business, then it is considered “hobby income” and reported Line 21 as “other income.” Mining expenses for hobby income have to be deducted separately on Schedule A as a miscellaneous itemized expense.
Each method has advantages and disadvantages depending on the circumstances.
If you need assistance determining which is best for you, please TEXT me and I will send the EXPERT Crypto-TAX Attorney's Contact Info straight to your phone, so you can call and get an attorney-client privileged consultation. Remember, most privileged communication is invoked at the time of RETAINER, even if it is $1, please consider making your confidential contact with any attorney enforceable by paying a small retainer EVEN if the services are offered for free. #ijs
If you don't have this all figured out just yet, set aside a couple hundred dollars, retain this expert and save yourself a world of stress.
Thanks for reading, voting, resteeming and donating to me and my blogging efforts, Avva.