Bitcoin has been called the future of money. It has created significant returns for some and tempts more and more people to get into cryptocurrency. However, Bitcoin taxes are often overlooked. Almost every Bitcoin transaction – mining, spending, or trading – can be a tax event for US tax purposes.
Although Bitcoin, and cryptocurrencies in general, are a digital currency, the US treat Bitcoin as assets for tax purposes. Therefore, selling or even spending Bitcoin can have capital gain implications.
To make matters more complicated for Bitcoin taxation, digital exchanges are not regulated. That means they do not issue a 1099 form, nor do they calculate gains or cost basis for you. Detailed record-keeping is therefore a must.
New regulations for ICOs
As of July of 2017, the US Securities and Exchange Commission ruled that cryptocurrencies are a currency. As a result, Initial Coin Offerings (ICOs) are regulated by the SEC. In turn, ICOs are still subject to reporting revenue received from these sales as taxable income.
As most companies only accept convertible virtual currencies in exchange for these tokens, companies will need to determine the fair market value of the convertible virtual currency received and report in US dollars.
There might be ways to structure this if the location of the operations is offshore and managed offshore.
Bitcoin tax implications in the US
… is taxable income, although the fair market value is not always easy to calculate as it depends on the day it was mined.
Receiving payments in Bitcoin
… in exchange for products or services or as salary is treated as ordinary income.
… is a tax event and can realize capital gains, which can be short term or long term gains. For example, you bought 1 BTC for $50. If that Bitcoin is now worth $100 and you buy a $100 gift card, you made $50 taxable gain.
… into USD or another currency can realize a gain and is a tax event.
… can produce capital gains or losses, which may be used to offset gains and reduce tax.
Initial Coin Offering (ICO)
… can produce taxable income that needs to be reported unless structured otherwise.
… on one exchange and selling on another exchange results in splitting the cost basis.
Basically, any time you sell bitcoin at an exchange, to another person, or buy goods or services, it is a tax event for US tax purposes and in many other countries.
All US citizens and residents have to pay tax on worldwide income, including income from cryptocurrency. In addition, your host country or country of business may impose different Bitcoin tax rules.
The IRS suspects that most Bitcoin users evade taxes by not reporting Bitcoin transactions on their tax returns. Given the transparency of the Blockchain technology it is however only a matter of time until audits will catch up with the increased use of digital currencies.
Bitcoin and other digital currencies generate enormous returns but are quite volatile. To reduce Bitcoin taxes requires proper tax planning. Since digital currencies are still fairly new, many tax accountants are not knowledgeable yet about Bitcoin taxation.
At Global Expat Advisors, we are very familiar with Bitcoin tax, as our clients include bitcoin miners and high-volume traders. We can help calculate ordinary income and capital gains from Bitcoin and reflect those properly in your US tax returns. As needed, we will draft tax opinion letters on the exchange of currencies. We also offer tax planning and structuring considerations for clients that mine or receive bitcoin as compensation.