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Tax Day Looms for Bitcoin Investors

Last Updated March 4, 2021 5:03 PM
Gerelyn Terzo
Last Updated March 4, 2021 5:03 PM

Despite the decentralized nature of bitcoin, Uncle Sam is expecting his fair share come April 15. Now that tax season is upon us, investors of bitcoin and other cryptocurrencies may be filing their crypto-generated income for the first time ever. Meanwhile, given the private nature of bitcoin, not to mention an opaque regulatory framework surrounding cryptocurrencies, investors may think that their gains can’t be tracked or that the tax requirement is obscure. The reality is the IRS wants its cut, and investors are responsible for reporting it on their tax returns.

Before investors can report their bitcoin income, they should know how it’s treated. Bitcoin and other cryptocurrencies are taxed as property, which places them in a similar camp to how equities and bonds are taxed. And while the IRS hasn’t updated its cryptocurrency guidelines since 2014, investors are still expected to report their crypto-gotten gains (or losses, if they placed a bet on Tezos, for instance) when they file.

No Russian Roulette

An accountant with knowledge of cryptocurrencies is quoted in The New York Times  as saying: “If you play audit roulette, you are a fool. If you made a single trade or more, report it.” For instance, if you sold any bitcoin, apart from kicking yourself, you are subject to a capital gains rate that is determined by how long you held the asset — anything more than a year puts you in the 0-20% range, while a shorter-term returns are taxed as ordinary income.  You can apply any losses to offset capital gains, as an option.

Even though the IRS doesn’t treat bitcoin or other digital coins as currency, consumers can still choose to spend them as such. While 40% of American cryptocurrency investors choose to hoard their bitcoin, more than half  intend to spend it to make a purchase in the physical world this year.

Bitcoin is increasingly being accepted at e-commerce sites, restaurants, retail chains, schools, airlines, city governments, travel booking operators  and more. A consumer who got in on bitcoin at $1,000 and purchased a vehicle when the cryptocurrency reached nearly $20,000 would have to report a capital gain of approximately $19,000, for example. Even bitcoin miners must report their earnings as gross income, attaching fair market value reflecting the time they received the reward.

The IRS considers any wages earned, whether paid in fiat money or cryptocurrency, as taxable both for full-time employees and freelancers.

Something to keep in mind. San Francisco-based Coinbase, the biggest US digital currency exchange, at the behest of a California court was required to provide the IRS with records of thousands of cryptocurrency investors who traded $20,000-plus in digital coins in the two-year period leading up to 2015. The tax agency had initially requested all records of all Coinbase members.

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