Tax season can be confusing enough with complicated rules about what types of income are taxable and which are not; what can be written off and what can’t; and which assets need to be listed and which do not. Add to that the confusion around digital currency and its status in the eyes of governments, and there are bound to be questions about how Bitcoin relates to taxes.
In the United States, for example, “taxable income” encompasses anything received as payment for goods and services. There is no reason that this would exclude payment in bitcoin. Bitcoin received from another person in the exchange counts as gross income, which is subject to income tax. Bitcoin earned through trade or by running a bitcoin exchange could fall under the “capital gains” category, like gold, and will be taxed. Bitcoins that are mined are counted as income received from the act of mining and are taxable with the expenses accrued (such as computing power) being deductible. When miners sell their bitcoins, they are taxed on any increase to the value of the bitcoins between when they were mined and when they were sold.
The Internal Revenue Service of the U.S. drafted a 2014 notice on “virtual currency” providing some guidance on its views of bitcoin as capital assets that are subject to taxes. However, users will have to look into the tax requirements for whichever country they are paying taxes in and sort out how their home countries classify cryptocurrencies like bitcoin.
To prepare for tax season, it’s important that bitcoin holders make a note of how much the digital asset is worth in relation to their local fiat currency. It is also advised to keep a detailed Bitcoin expense report and record the value of bitcoin when it was spent, in case any of these expenses can be written off.
Hiring an experienced accountant is a great way to ensure your Bitcoin-related tax filings are accurate. Several services exist to help users figure out how to pay their Bitcoin taxes, including CoinReporting and Bitcoin Taxes.
While nobody is promising that it will be fun, accurately recording and reporting Bitcoin income is a crucial aspect of the digital currency economy.