Even if you are only vaguely familiar with cryptocurrencies and how they work, you’ve probably heard of Bitcoin, which soared as much as 1,000 percent in value by the end of 2017. Just like income and profits from traditional investments, investors will have to file a tax return and pay taxes on qualified Bitcoin earnings. If you’re not sure what you’ll owe or how to go about including your Bitcoin profits on your yearly income tax return, don’t panic. Our tax professionals will guide you through the process and ensure that you are in full compliance with IRS rules and regulations for emerging cryptocurrencies.
Bitcoin and Cryptocurrencies: A Brief Overview
Although Bitcoin is one of the most well-known types of cryptocurrency (also sometimes referred to as digital or virtual currencies), there are over a thousand different types. Some of the most commonly traded crypto coins after Bitcoin are:
- Litecoin (LTC)
- Zcash (ZEC)
- Ripple (XRP)
- Ethereum (ETH)
Unlike traditional currency like dollars and Euros, which are distributed and regulated through a central bank, cryptocurrencies are unregulated and decentralized over a secure digital ledger system known as blockchain, which allows for a great deal of anonymity in transactions. Cryptocurrencies can be used to pay for goods and services online where they are accepted, but they are also increasingly being traded for profit.
Paying Income Tax on Your Bitcoin and Digital Currency Earnings
If you were one of the many people holding on to or trading in Bitcoin in the past year, chances are that you made a profit from its skyward trajectory. Just like trading in and profiting from stock trades and sales, Bitcoin sales or exchanges to other altcoins are considered taxable income by the IRS. In order to avoid potential penalties and interest, it is important to treat your digital finances and income as you would traditional income and investments. Cryptocurrency mining has additional different taxable events that need to be tracked and reported.
Managing Bitcoin and Digital Currency Income and Tax Liability
- Request your transaction data from your coin exchange and keep detailed records of all of your transactions (at the moment, the IRS taxes cash profits from trades or the sale of goods and services, not the balance in cryptocurrency holdings).
- Taxable Bitcoin income is reported as a Schedule D attachment to Form 1040.
- Your tax rate will depend on factors like your individual tax bracket, the number of your profits, how you acquired the cryptocurrency, and how long you have been holding and trading them.
Get Help Filing Your Tax Returns Today
Navigating the cryptocurrency landscape can be complicated, especially around tax time. For more information about paying taxes on your Bitcoin earnings and filing your income tax returns, contact us today by calling (281) 440-5740 to schedule a consultation.