A coworker recently remarked that she used Bitcoin to purchase a coffee in her trendy Minneapolis neighborhood. That $3 purchase might come with a hefty price tag come April 15th however based on the Internal Revenue Services' (IRS) interpretation of virtual currencies.
Per the IRS virtual (crypto) currencies like Steem or Bitcoin are not actually a currency, but rather property. Like other property investments (homes, bonds, stocks, collectibles) they too has a cost basis and depending on the exchange value generate gains or losses when used or exchanged into hard currency.
Below are a few tips for would-be crypto users to stay on the right side of the IRS and likely your state taxing authority as well:
Keep track of when you acquire or dispose of a crypto currency, how much was obtained or sold/exchanged, and what the exchange value of the currency was at the time of the transaction.
At tax time document all sales/exchanges of crypto on Schedule D. If you're an avid user of crypto this might make for a long Schedule D! The IRS isn't particularly fond of "Various" in the transaction line so best to list out specific transactions. And, unlike a mutual fund or ETF transaction there isn't established guidance on a blended cost basis.
*Keep in the mind the rules of short and long-term capital gains. If the sale/exchange occurs within 365-days of purchase your transaction is subject to short-term capital gains which are taxed at ordinary income rates. On day 366 you'll benefit from reduced long-term capital gains rates which could be zero depending on your total tax situation (disclaimer: here is where I'm to say that you should contact a qualified tax professional to discuss the specifics of your return).
*Unless the existing tax rules borne out of the Affordable Care Act (ACA or "Obamacare") are repealed, you higher wage earners will also pay the 3.8% net investment income tax!
*Record any costs or fees related with your buying/selling/exchanging of crypto as these expenses increase your cost basis and either shrink your taxable gain or increase your loss should your transaction occur below your acquisition price.
*for larger and regular users of crypto consider mark-to-market tax reporting on a Schedule C instead. Mark-to-market rules differ from gain/loss reporting on a Schedule D and are not appropriate for most investors. Again, consult a tax professional to determine the pros/cons of such alternative reporting.
For the full IRS publication summary click here: https://www.irs.gov/pub/irs-drop/n-14-21.pdf
If you're a neighbor to our north and wondering how virtual currency transactions are taxed in Canada, check out this link: http://www.advisor.ca/tax/tax-news/what-to-do-with-digital-currency-166232
If you found this article helpful please PROMOTE! I could use a little extra Steem to spend and pay taxes on!