April 17th is fast approaching, and people are in high gear to determine what they owe the government or what the government owes them in return. But what does tax season mean for all of those folks who have luckily, or maybe unluckily, invested in Bitcoin? Bitcoin and other cryptocurrencies have firmly supplanted themselves in almost daily public discussion and debate. One can read daily about the massive gain or loss bitcoin investors have made, and the uses to which investors have put the supposed anonymity of cryptocurrency. And while anonymity is beneficial if you are trying to avoid detection of illicit activity, it will not provide an end around the IRS. As bitcoin is a relatively new product, regulators have been slow to catch up. Based on guidelines issued in 2014, tax authorities treat bitcoin like other property, such as stocks.   Weary of possible tax evaders using cryptocurrencies to avoid their obligations, the IRS has gone after coin changes, and partnered with software companies to monitor cryptocurrency, in an attempt  to determine who has failed to pay proper taxes.

So what exactly are your tax obligations if you have been trading in bitcoin? Well, first, a lot depends on timing. If you purchased the coin years ago and just now cashed in on what is certainly a large return, you probably owe the typical long term capital gains rate calculated against the price at which you bought or traded in. If you have been trading in the short term, any gains will be subject to a slightly higher rate. Additionally, any long or short term losses will count against gains made elsewhere. So far pretty simple.

But what about if you are in the all the more complex business of “mining” bitcoins? Mining involves running complicated algorithms on large computers to discover new coins, which are slowly released from Bitcoin’s own network in twenty-five coin blocks. Put another another way, these machines are effectively creating currency. If you are one of the lucky miners who has discovered new bitcoins in the past year, you must treat this as income, which is calculated based on the current value of the coin at the time discovered. Additionally, as self-employed miners, taxes must be paid into social security and medicare, as well.

All of this may seem relatively intuitive. Bitcoins purchased as investments are treated like any other capital gain. Bitcoins “mined” through ones own efforts are treated like income. But the key requirement for anyone operating in a bitcoin marketplace or exchange is that you constantly monitor and record the transactions you make. Unlike typical stock exchanges, the exchange itself is not required to report the transactions that take place. Thus, individuals are responsible for monitoring their own activity and reporting it on their tax returns. For those who fail to do this, the IRS has shown that it will not hesitate to knock on the door of most popular exchanges, looking for records of  transactions made to determine who has failed to report. Best to avoid that.

–Anderson Kemp

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