Inquiring minds at the Internal Revenue Service would like to know.
The bitcoin price started around $900 last year, soared to nearly $20,000 and then fell back to about $14,000 by year-end.
If you bought bitcoins (or any other cryptocurrencies), you should know that any transaction is potentially taxable.
Although there is no current requirement for bitcoin exchanges to report transactions to the IRS, you are responsible for reporting taxable events. And the IRS can compel an exchange to provide information, as it has done by requiring Coinbase, one of the largest exchanges, to provide data from US customers on transactions since 2013.
To simplify, if you bought bitcoins as an investment, you will owe short or long-term capital gains tax when you sell them (at a profit). If you got killed instead of making a killing, the silver lining is that you may take a capital loss when you sell.
On the other hand, if you used the bitcoins to actually buy something, then you will owe a tax at income tax rates on each transaction if you made a profit (bitcoin value at the time of use – bitcoin cost). Unfortunately, if you had a loss when you bought something – no silver lining – you may not deduct the loss on your taxes.
If you did both – investment (bought and sold) and personal use (bought and used) – the tax treatment is murky. But in any case, if you had any dealings with cryptocurrencies, make sure you tell your tax preparer so they can properly account for the transactions on your tax return.
Contact our fee-only financial advisor with any additional questions.