Cryptocurrencies (also known as digital currencies or virtual currencies) like Bitcoin and Ether are becoming increasingly popular due to their high value, and the fact that in many environments they can be used almost the same way as traditional currency. Using digital currencies can also have the benefit of removing the inconveniences that regular currency can have like exchange rates (for direct purchases) or bank fees.

While it can be an attractive option for many different purposes, cryptocurrency is unique and currently unregulated (although that may change in the near future) making it confusing to figure out how or if you should report it on your taxes.

With the 2018 tax season in full swing, this post gives a simplified look into the world of digital currency and discusses how you should handle it when filing your taxes.

What is Cryptocurrency?

Simply put, cryptocurrency is a digital currency, meaning it does not come in physical coins or bills. Instead, cryptocurrency is entirely virtual and completely decentralized, which means that there is no authority (such as a government or bank) that controls it. Instead, users transfer the currency between each other using an encryption method such as blockchain.

Bitcoin, a popular digital currency, showed significant increases and decreases in value in 2017 alone, with its highest value being closer to $1000 US per coin near the end of the year. Due to this high value, it’s easy to see why so many people are jumping on the digital currency bandwagon.

Do I Need to Report Cryptocurrency on My Taxes?

Following the success of digital currency in general, the IRS posted a notice on their website back in 2014 that discusses when you need to report your cryptocurrency on your taxes. Generally, you’ll need to report your currency if it’s acquired or used in the following situations:

  • If your employer pays you with digital currency, it is considered taxable income, so it should be reported on income tax and payroll taxes like traditional currency.
  • If you are making payments using cryptocurrency to independent contractors and service providers, then self-employment taxation rules generally apply.
  • Selling, trading, or otherwise obtaining a gain or loss from the sale or exchange of cryptocurrency is considered a capital asset (property that has the potential to generate value) and therefore should be claimed on taxes.
  • Mining cryptocurrency (essentially using a high-powered computer or even a smartphone along with software to acquire “coins”) is generally considered a taxable event.

Here are some situations where you would most likely not have to report your virtual currency on your taxes:

  • Buying cryptocurrency using US dollars and then saving it instead of spending it is generally not a taxable event. The currency becomes taxable once it is sold or traded.
  • Giving virtual currency as a gift may not be taxable, but if the value of the gift exceeds a certain amount, it may be subject to the gift tax.
  • A wallet-to-wallet transfer (a transfer of funds from one person to another without the involvement of a third party like a bank) of virtual currency may not be taxable, but it is important to keep records to indicate that you are not trying to avoid legal or tax regulations.

Regardless, you should always double check the IRS’s current requirements on virtual currency and how to include it in your taxes as they could change at any time.

Why is Virtual Currency Taxed Differently Than Traditional Currency?

The key difference between virtual currency and traditional currency is that it is taxed as property rather than currency by the IRS, so it can fall under investment property, personal property, or business property. This is most likely because virtual currency is not regulated or centralized like traditional currency, so taxing it as property seems to make the most sense.

How Do I Pay My Cryptocurrency Taxes?

Best practice for calculating how much tax you need for pay for your cryptocurrency would be to use a form like a Personal Financial Statement to help you keep track of your virtual currency transactions as well as your other finances.

In order to correctly report your digital currency on your taxes, you’ll need to figure out how much each transaction was worth in US dollars at the time it occurred. Because cryptocurrency can spike and drop in value relatively quickly, it’s easier to keep track of its worth if you take the time to record each transaction as it happens.

Websites like CoinDesk do a good job of recording the ebbs and flows of virtual currency value down to the specific day, and can even show you historical data if you need it.

Once you have all the information you need, the IRS indicates which tax forms you need to use on their virtual currency guidance page.

There are also some services available online for helping you calculate your virtual currency taxes, such as Bitcoin.Tax (which offers free calculations for up to 100 cryptocurrency transactions) or CoinTracking.Info (free up to 200 transactions). You’ll still need to keep track of all your transactions and have the files ready to upload if you choose to use these sites.

Digital Currency and Your Taxes

The internet has given us so many different options for buying, selling, and trading in a global market. With stronger connections between countries, it makes sense that global digital currencies have surfaced in an attempt to make transactions easier.

Since cryptocurrencies are growing in popularity, be sure to keep up on current regulations and laws to make certain that you’re on the right track when it comes to buying, selling, recording, and filing your cryptocurrency transactions.

Would you invest in Cryptocurrency? Let us know in the comments!

Posted by Lisa Hoffart

Lisa is a writer in Edmonton that is passionate about video games, and technology in general. She has also written articles for xdadevelopers.com.

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