Bitcoin And Taxes: What You May Not Know

You might be aware that your Bitcoin (BITCOMP) or other cryptocurrency transactions have a possible taxable impact. However, you might not know exactly how to report them. Try our bitcoin tax calculator or read on for more guidance on cryptocurrency taxes.

What is Bitcoin?

Bitcoin is a worldwide payment system where users buy virtual currency using an exchange. The Bitcoins are stored in a digital wallet and can be transferred using a mobile app. No bank or other intermediary institution is involved.

Bitcoins can be used as a digital currency to send or receive funds, pay for goods or services, or simply for investment.  Transactions are anonymous and are tracked only via the digital wallet identifiers on a public ledger. Originally used by illicit operators, mainstream companies such as Overstock.com now accept Bitcoin as payment.

Enter the IRS

The Internal Revenue Service (IRS) isn’t blind to Bitcoin and provided guidance about “convertible virtual currency” in its Notice 2014-21.

The IRS defined convertible virtual currency as virtual currency that has an equal value in real currency, or that is a substitute for real currency.

The IRS specifically referred to Bitcoin as a type of convertible virtual currency that can be digitally traded. In addition, you can buy or exchange virtual convertible currencies into U.S. dollars or other real or virtual currencies. However, virtual currency itself does not have legal tender status in the U.S.

Tax Liability

“Though cryptocurrencies seem like a brand-fangled new investment, one with which our, by comparison, antiquated tax system can’t compete, they are actually taxed like pretty much any other mundane item,” emailed Mark Durrenberger, Certified Financial Planner®, Enrolled Agent and author of The Modern Day Millionaire.

If you sell, exchange, or use convertible virtual currency to pay for goods or services, you might have a tax liability. For tax purposes, the IRS treats convertible virtual currencies as property. If you receive Bitcoin as payment for goods or services you provide, then when you compute your gross income, you must include the fair market value of Bitcoin in U.S. dollars as of the date you received the Bitcoins.

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