Cryptocurrency Investors: Beware of US Income Tax Implications & Reporting

Board with Bitcoin and other cryptocurrencies on it. Beware of US income tax implications & reporting.


If you are a bitcoin investor and have gains from an exchange or have made purchases using cryptocurrency, don’t forget IRS is entitled to its share of tax on those gains. The IRS highlights the tax implications of Cryptocurrency in Notice 2014-21.

The Tax Cuts and Jobs Act of 2017 eliminates the “like-kind” exchanges outside of real estate. Many investors have been using like-kind exchange to defer capital gain taxes on trading of cryptocurrencies. 

The IRS has determined that US taxpayers should treat digital currency as capital assets. As such transactions can be subject to short term capital gains taxed at ordinary income tax rates or long-term capital gain tax rates, if the asset is held for more than twelve months. Long term capital gains are taxed at 15% or 20% depending on income. You may also be subject to state taxes. The character of gain or loss depends of whether the cryptocurrency is held as an investment or other business property in the hands of the taxpayer.

Another complication exists when cryptocurrency is used to pay for services. Some vendors have begun to accept Bitcoin as a form of payment like credit cards or PayPal. The IRS position on this matter is that anytime a purchase is made, it is considered a sale of Bitcoin. Any profit on the Bitcoin from the original date of purchase that would be considered a gain and reported as mentioned above. Any loss on sale would be able to offset gains. Treatment of excess loss will depend on the type of taxpayer. A taxpayer who receives Cryptocurrency in exchange for goods or services must include in his or her gross income the fair market value of the Cryptocurrency on the date received.

Mining Cryptocurrency, either as a hobby or a business, is considered self-employment income. When a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency is includable in gross income as self-employment income and subject to the self-employment tax.

When it comes to determining the taxation of cryptocurrency transactions, it is important for cryptocurrency owners to properly track basis. This creates a potential accounting challenge for taxpayers who use it for everyday purchases because a taxable transaction occurs every time a cryptocurrency is exchanged for goods or services. Failure to timely file or correctly report virtual currency transactions may subject a taxpayer to information reporting penalties under section 6721 and 6722. Additionally, underpayments attributable to virtual currency transactions may subject taxpayer to accuracy related penalties under section 6622.

If you have any transactions in Cryptocurrency, please contact any RINA representative for more information.

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