t’s been a turbulent year for bitcoin, and now it’s time to talk about taxes. Most people who held on to bitcoin over the past year made money off of it, and as Americans prepare for income tax season, the IRS wants its cut of the profits. Amid unprecedented gains — and unprecedented enforcement efforts — this looks to be the year that tax collectors get serious about bitcoin earnings, which means it’s a very good time to make sure you’re doing everything right.
We’re talking about income tax, so your goal is to figure out your income from bitcoin in 2017. For the purposes of the IRS, that means bitcoin assets that were converted into non-bitcoin assets like cash or goods and services. Your bitcoin holdings aren’t taxable (at least not yet), but any time you sold bitcoin or used it to buy something, you were accruing taxable income.
You’ve already got records of most of those transactions, either on the blockchain or from your wallet provider, but converting it to dollars can be a real hassle since you’ll need to run the bitcoin value against the price of bitcoin at the time of the transaction.
Most people will have income from buying bitcoin and then selling it at a higher price. If that’s true for you, then any income from the sales needs to be reported on Schedule D, an attachment to Form 1040.
How you report the sales will depend on how long ago you bought your bitcoin. If you’ve held the bitcoin less than a year before transacting with it, it’s taxed as a short-term capital gain, which is still taxed at the same rate as ordinary income. But if you’ve held bitcoin longer than a year before using it, bitcoin is taxed as a long-term capital gain at lower rates of anywhere from 0 to 20 percent, also depending on what income bracket you fall under. If you’re in the top three highest income brackets, you also have to pay a 3.8 percent tax on net investment income. (It’s also worth noting that while not being taxed as ordinary income, capital gains may increase your overall adjusted gross income, which could impact which tax bracket you ultimately fall under.)
In every case, the tax rate on your bitcoin sales depends on your method of acquiring bitcoin and the length of time you’ve held it. Here’s a chart, because it’s complicated. Just know you’ll be making heavy use of the first few pages of your tax return as well as Schedule D.
If you were paid for goods or services in bitcoin, it gets taxed as ordinary income. (It technically is income, just in a different currency.) Depending on your income bracket for 2017, the federal tax rate can be anywhere from 10 percent to 39.6 percent. The bitcoin will also be subject to state income tax.
If your bitcoin account is held abroad where the private keys are owned directly by the exchange, you get double the fun: the value of the account has to be reported to the US Treasury using FinCen form 114, and to the IRS with the form 8938. US residents and citizens who own less than $10,000 of assets abroad don’t have to report.
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