In 2014, the IRS issued guidance on how to report cryptocurrencies on your federal tax return. Notice 2014-21, 2014-16 I.R.B. 938 explains that all virtual currencies, including Bitcoin, are treated as property for federal income tax purposes. Here’s what that means for your business and how to report cryptocurrencies on your next tax return.
How are cryptocurrencies taxed by the IRS?
According to the IRS, “Virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.” This means that you must recognize any capital gains or losses that occur when you sell cryptocurrency. You’ll pay a tax on capital gains while you will be eligible for a deductible if you’ve incurred losses. Essentially, the IRS applies the same principles it does to taxing stocks, bonds, or gold.
[Read more: Considering Accepting Cryptocurrency? What to Consider ]
How do I report earnings on cryptocurrency?
The first step is to determine the amount of capital gains or losses you experienced during the tax year. To do this, calculate the difference between the currency’s value at the time of its disposal and the amount for which it was acquired, including exchange or transaction fees. For instance, if you bought Bitcoin for $2,000 and sold it for $3,000, your capital gains would be $1,000.
Note that these earnings only apply if you “disposed” of the currency either by trading it on an exchange or spending the crypto as currency. “If you only bought but didn’t sell crypto during the year, electing to hold it in a wallet or on a crypto platform, you won’t owe any taxes on the purchase. Much like you wouldn’t owe taxes for buying and holding stocks for your portfolio,” wrote Turbo Tax.
Once you have calculated your gains or losses, you’ll need to fill out IRS Form 8949. Use this form to report each crypto sale during the tax year, including the dates and value of the cryptocurrency when you bought and sold it. This is the same form you will use to report any earnings from other investments (such as stocks) during the tax year; these earnings must be recorded on separate forms 8949.
You’ll also need to file Form 1040 Schedule D, which reports your overall capital gains and losses.
You must recognize any capital gains or losses that occur when you sell cryptocurrency.
What are the tax rates for cryptocurrencies?
Cryptocurrency is subject to the same principles as other investments when it comes to short-term and long-term capital gains tax. The IRS mandates that if you held the virtual currency for more than one year before selling or exchanging it, then you have a long-term capital gain (or loss). Long-term capital gains tax rates are 0%, 15%, or 20%, depending on your income level.
“The period during which you held the virtual currency (known as the “holding period”) begins on the day after you acquired the virtual currency and ends on the day you sell or exchange the virtual currency,” wrote the IRS.
How are businesses taxed on crypto?
Here’s where things get a little more complicated. If your business begins accepting cryptocurrency during the normal course of doing sales, you have a few options.
Because the IRS considers virtual currency as property, it is not categorized as legal tender. As a result, the fair market value of crypto payments is considered to be ordinary income subject to income taxes, including self-employment tax, according to Rocket Lawyer. If you do not exchange or convert the crypto payment into fiat currency, you may have to pay more taxes down the road.
“When a business accepts cryptocurrency as payment for goods and services, the transaction must immediately be recorded as income using the fair market value of the cryptocurrency on the date of receipt,” wrote Rocket Lawyer. “Technically, you are not obligated to exchange or convert the cryptocurrency into U.S. dollars immediately. However, if you do not do so, and the value of the crypto goes up, you could find yourself having to pay both income taxes as well as reporting and having to pay taxes on capital gains when the currency is ultimately converted into dollars or used to pay for business expenses.”
[Read more: How to Accept Bitcoin Payments]
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