Bitcoin tax strategies

This focus resulted in the IRS releasing guidance on the reporting and taxation requirement for the sale, purchase, and trade of cryptocurrency—but some grey areas remain. According to the notice, "Virtual currency is treated as property for U. An additional 3.

By treating bitcoin and other virtual currencies as property instead of currency, extensive record-keeping rules are imposed, and significant taxes may apply. General accounting and tax principles apply to cryptocurrency for purposes of capital gain tax treatment. However, certain activities, such as mining, could be subject to ordinary tax rate treatment. IRS Notice outlines these activities. Additionally, if you receive compensation from services in the form of cryptocurrency, these could be subject to employment or self-employment taxes similar to other compensatory payments received.

The following cryptocurrency transactions can be taxed: Exchanging cryptocurrency for other cryptocurrency Mining cryptocurrency Paying for goods and services with cryptocurrency Hard forks and split chains Donating cryptocurrency Decentralized Finance DEFI Exchanging Cryptocurrency for Other Cryptocurrency Taxpayers commonly used to ask the question whether cryptocurrency exchanged for other cryptocurrency without USD ever received was a taxable event.

The short answer is yes, the IRS appears to view these exchanges as taxable events. IRC Section , known as the like-kind exchange rules, used to apply to real and personal property, however, the rules changed in to apply only to real property. Even before the updated rules, it was considered an aggressive approach to apply them to cryptocurrency. Mining Cryptocurrency IRS Notice , IRS Virtual Currency Guidance, states that taxpayers earn taxable income when they receive a block reward of virtual convertible currency for successfully mining a new block on the blockchain.

The taxable income earned is the determinable fair market value FMV in US dollars of the virtual convertible currency earned from the block reward. This income is considered ordinary income and the amount reportable is based on the FMV of the cryptocurrency at the time it was successfully mined. Retirement-account investors interested in mining bitcoin—versus trading bitcoin—should be aware that such activity could be subject to the unrelated business taxable income tax rules if the mining is deemed a trade or business.

Paying for Goods and Services with Cryptocurrency IRS Notice Question 4 addresses how to treat virtual currency received as payment for goods or services. IRS Notice Question 6 addresses whether gain or loss should be recognized when exchanging virtual currency for other property. When a business receives cryptocurrency for services or as payment for goods, the business is required to recognize revenue when payment is received. The complexity increases with the frequency of payments.

A hard fork, in simple terms, is when a single cryptocurrency splits in two. A hard fork requires all nodes or users to upgrade to the latest version of the protocol software simultaneously. There are different ways a hard fork can play out, including: No new cryptocurrency. This is sometimes called a soft fork. New cryptocurrency. Here are three things that "savvy investors do," according to Chandrasekera. Tax-loss harvesting Chandrasekera recommends a strategy called tax-loss harvesting, where investors sell their cryptocurrency at a loss in order to offset their gains.

Instead of holding your underwater positions, you can sell them, buy back and harvest the loss," he says. For this to work, investors must know how much they bought their cryptocurrency for to begin with, known as their cost basis, so they can calculate the difference.

This requires careful record keeping and can be difficult without the use of a reputable software tool that tracks your transactions for tax reporting. But if done correctly, it can create significant tax savings. Keep in mind that you can only offset capital gains with the same type of losses, so long-term losses are used to reduce long-term gains, and short-term losses are used to reduce short-term gains.

Cryptocurrency is not subject to what are called "wash sale rules," so "you don't have to wait 30 days to buy back the same position," Chandrasekera says. Wash sale rules prevent investors from immediately buying back the same stock after selling at a loss. Though policymakers proposed imposing wash sale rules on commodities, currencies and digital assets in the Build Back Better Act, the legislation has not been passed.

Understand long-term vs. Long-term capital gains are realized when an investor sells after holding an asset for at least 12 months, while short-term capital gains are realized when investments are sold in less than 12 months. And remember, if you don't sell any crypto or engage in any other taxable events, you aren't required to pay taxes yet.

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