If you have been worrying about how to report your Bitcoin transactions or trading profits to the IRS, worry no more.
The tax agency issued new guidance this week, explaining that Bitcoin should be treated as if they were any other kind of property.
According to Jacob S. Farber, senior counsel at law firm Perkins Coie, the biggest issue for taxpayers until then was whether they should account for Bitcoins as foreign currency or not. The simple answer: no. Which, actually, will be good news for some long-term Bitcoin owners.
“Lower capital gain tax rates may be applicable to those who have held their virtual currency for more than one year, rather than the higher ordinary income rates which apply to almost all transactions in foreign currency,” said Farber, who is also a member of the firm’s Technology Transactions & Privacy practice, in an article today.
The firm also ha a report covering the laws and regulations relating to virtual currencies around the world. Check it out if you’re planning to spend your Bitcoins overseas, and be sure to avoid Russia and Croatia.
Meanwhile, here’s are the basics for US taxpayers, in plain English. Remember to consult a tax attorney before making any major decisions, like Tyson Cross of Bitcoin Tax Solutions.
Bitcoin income is taxable
If you do work for someone, and they pay you in Bitcoin, that income is taxable. It as if they had paid you in, say, potatoes, or real estate. And your income is equivalent to the value of those Bitcoins at the time you were paid.
If you mine Bitcoins and sell them, the income is taxable
It’s the same as if you were, saying, growing potatoes. You could write off the costs, however, just as you would write off the costs of the seed stock and tractors and everything else related to the potato growing if you were a potato farmer. In the case of Bitcoin mining, that would include the cost of the servers, the electricity, Internet connectivity, and professional services.
If you buy and sell Bitcoin, the profits — or losses — are taxable
Imagine that you were buying and selling real estate. If you buy a house, and its value increases, you have to pay tax on the profits when you sell it. If the value decreases, you have a loss, which you can use to offset other income. The same goes for Bitcoin, with one important difference — you can tell houses apart pretty easily. But all Bitcoins look alike. So if you buy some Bitcoins one day at one price, and another day at a different price, and then sell them in multiple batches as well, then it can get very complicated to figure out your profits and losses.
Keep very good records and be consistent
Make sure you keep track of when you acquired your Bitcoins, and how much they were worth on that day. If you receive the Bitcoin as gift or payment and you use a particular exchange to estimate the value of your virtual currency holdings, use that same exchange for all future calculations — don’t pick and choose based on who has the best price that day.