What Are the Tax Consequences of Bitcoins And Other Cryptocurrencies?

There is growing interest in bitcoins, ethereum, litecoins, and other cryptocurrencies. This is fueled by the dramatic increase in the value of bitcoins and other digital coins in the past few years. There are many stories of people who bought early on and are now millionaires, at least on paper.

This leads to a very important question. What are the tax consequences of buying and selling bitcoins and other digital currencies?

On March 25, 2014, the IRS ruled that bitcoin will be treated as property for tax purposes, not as currency. This means that when digital currencies, like bitcoin, are sold, taxpayers must report the sale on their income tax returns as a capital gain or as a capital loss, similar to when stocks are sold.

If there is a loss on the sale of digital currencies, then up to $3,000 loss can be reported each year, until the total loss is applied.

The reporting of capital gain or loss gets particularly tricky and complex for the sale of digital currencies, especially if a bitcoin or ether is used to buy other digital currencies, like Ripple or Dash. How should the cost basis be calculated when one digital currency is exchanged for another?

For those who have not reported the sale of cryptocurrencies in the past, they ought to amend their prior tax returns to report the sale of bitcoins and other digital currencies.

On November 29, 2017, the IRS won a court ruling against Coinbase, that one of the largest U.S.-based cryptocurrency trading platforms must submit to the IRS information on taxpayers who traded more than $20,000 on a yearly basis.

For these reasons, people who bought and sold bitcoins and other digital currencies should see a tax professional, like an Enrolled Agent, to consult on and to report properly the sale of cryptocurrencies.

One tax resource that may help you keep track of capital gains and losses of your cryptocurrency trades is cointracking.info  Click here to sign up and generate capital gains reports.