Demetrius J. Karos, Ltd. Tax Representation From A Former IRS Employee

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Bitcoin gains or losses? How to account for them on your taxes

The IRS has stated that, for federal tax purposes, virtual currency or cryptocurrency investments are treated as property, with general tax principles applying. For people in the business of trading or mining these virtual currencies, any gains will be treated as ordinary income. For those who invest in or hold cryptocurrencies for personal (non-business) reasons, they are considered capital assets. Net gains are subject to the capital gains tax.

That means your Bitcoin or other cryptocurrency investment will be taxed either at the ordinary income rate or the capital gains rate.

Which rate will apply depends on whether your gains are short-term (one calendar year or less) or long-term. Short-term capital gains are taxed at your maximum ordinary income tax rate. Long-term gains are favored by the government, so you will pay 0 percent (for lower-bracket taxpayers), 15 percent or 20 percent, depending on your situation.

To figure out whether your investment would be considered short- or long-term, you need to know the date you purchased the asset and the date you sold it. The year is calculated from the day after you bought it to the day you sold it.

Capital losses are also treated differently depending on whether they are short- or long-term. You can use your losses to offset your gains, but they must be used first to offset losses of the same type. Once you've offset all your same-type gains, your net losses can be used to offset the other type and, ultimately, other types of income. There are limits to the amount of other income you can offset, however, but if you reach those limits you can carry over excess losses to the next year.

The IRS will be checking some returns against Coinbase records

Cryptocurrency being what it is, the IRS is naturally concerned that some taxpayers won't accurately report income or gains derived from this source. And, with the recent surge in value for these virtual assets, many taxpayers will have net gains that are taxable.

In order to limit tax avoidance, the Justice Department asked a court to issue a Jane Doe summons to Coinbase, one of the largest U.S. virtual currency exchanges. After some legal wrangling, Coinbase will provide the IRS with information on all Bitcoin transactions of $20,000 or more that took place between 2013 and 2015. These transactions include exchanging Bitcoin for hard currency, along with sending or receiving Bitcoin from another Bitcoin user.

If you believe you may have calculated your tax incorrectly for gains in those years, you should file an amended return as soon as possible.

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