The IRS has ruled that bitcoin and other cryptocurrencies are considered property, not currency, for tax purposes.
That means that consumers should be reporting capital gains if they used bitcoin to make an investment and then cashed out, CNBC reported. Considering the value of the bitcoin has surged this year, it’s not an unlikely scenario.
However, don’t look for a Form 1099 from whatever exchange you traded on. The responsibility to pay taxes on gains lies with the taxpayers.
“If you make a transaction, the onus will be on you to report it,” Samuel Boyd, senior vice president of Capital Asset Management Group, told CNBC. “Those transactions generate either short-term capital gains or losses or long-term capital gains or losses.”
A U.S. District Court in California in November ordered Coinbase, a popular platform for buying and selling cryptocurrencies, to turn over identifying information on 14,000 accounts. The court case stemmed from an IRS finding that for each year from 2013 to 2015, only about 800 taxpayers claimed bitcoin gains. During that time, the cryptocurrency rose dramatically from about $13 to more than $450. One bitcoin is now worth more than $11,000.
The IRS originally asked for information on more than a million accounts. Then the agency narrowed its request, asking only for accounts that conducted bitcoin transactions – either exchanging bitcoin for dollars, or sending or receiving coins from another bitcoin user – worth $20,000 or more.
If you held it for one year or less, it is a considered a short-term gain and is taxed as ordinary income. Depending on your tax bracket for 2017, that could range from a tax rate of 10% to 39.6%. After owning it for more than one year, it is taxed as a long-term gain. Taxable rates on those gains range from 0% to 20%.
“I’ve told clients who own it that it’s up to them to track their cost basis, their holding period and their sale price,” Boyd said. “It might seem innocuous and veiled and like no one will follow up, but records of those transactions are available.”
Fortune reported, “The IRS dispute with Coinbase is likely to be just the opening salvo in a prolonged effort by the federal government to ensure digital currency speculators pay their taxes.”