1. Bitcoin Tax Guide: An Introduction
  2. Bitcoin Tax Guide: Trading Gains And Losses - Fair Market Value
  3. Bitcoin Tax Guide: Trading Gains And Losses - Alt-Currencies
  4. Bitcoin Tax Guide: Trading Gains And Losses - LIFO, FIFO, Offsetting Lots
  5. Bitcoin Tax Guide: Trading Gains And Losses - Wash Sales: Impossible To Track?
  6. Bitcoin Tax Guide: E-commerce Taxation
  7. Bitcoin Tax Guide: Donations
  8. Bitcoin Tax Guide: Gifts And Tips
  9. Bitcoin Tax Guide: Lost Or Stolen Bitcoins

While much has been written about the March 2014 IRS tax guidance on virtual currencies, few have done comprehensive analyses of the plethora of record-keeping and enforcement challenges that will arise as a result of the agency's decision to treat Bitcoin as property rather than currency. Diverse stakeholders ranging from consumers, merchants, miners and Bitcoin service providers (all of whom may also be considered "investors" at various times) must now grapple with complex and unclear tax reporting requirements in the coming months - even though more clarifications and changes from the agency seem inevitable following the "public comment" period this spring.

This is the first installment in a multi-part series that takes an in-depth look at the coming tax consequences of IRS Notice 2014-21 for the U.S. Bitcoin industry.

For this installment, we'll kick things off by outlining what Joe Consumer should discuss with his tax adviser in advance of filing his personal tax returns on April 15. For the sake of our article (and round numbers), we will assume that Joe is married and that he and his wife made a combined $100,000 of taxable income in 2013.

With that in mind, how should Joe report trading gains and losses for Bitcoin and any of his other alt-coin investments? How about purchases he made with Bitcoin?

What about the funds he lost in his trading account at the now-defunct Mt. Gox exchange - can those be written off? And how about that gift he gave to Dorian Nakamoto's fundraiser or the tips he received for his blog posts?

We'll attempt to tackle the basics for Joe Consumer, but the best synopsis may be this: Talk to a tax expert as soon as possible, even if you are one yourself.

Trading Gains & Losses

Property, Not Currency

The most widely reported aspect of the IRS ruling on Bitcoin has to do with its treatment as property. This is a favorable ruling for most investors given Bitcoin's stellar performance to date, as accrued long-term gains and losses will be taxed at the taxpayer's applicable capital gains rate (15% in Joe's case) rather than ordinary income rates (25% for Joe). For many early Bitcoin "miners" and investors, this constitutes a massive difference in marginal rates. That said, active traders who have racked up short-term capital gains may still be taxed at ordinary income rates.

Investors with trading losses, on the other hand, might not be so happy with the ruling. It will be much more difficult to write off bad Bitcoin bets now that they are considered property rather than currency. The IRS limits the amount of property losses (net capital losses, to be specific) that can be claimed on personal tax returns to $3,000 per year for both married and single filers, a limit that hasn't been raised since 1978. For these unfortunate folks, large short-term trading losses will need to be carried forward, in some cases for many years. Trading losers would have been much better off if they could have written off "foreign currency" losses against their ordinary income.

And this is the most basic application of the IRS guidance. Buckle up folks, because the rest of this article may blow your minds, not to mention demonstrate the dire need for the IRS to conform certain areas of the tax code to the new world's peer-to-peer structure. The full nuance of Bitcoin's property tax treatment is complex, but let's try to break it down piece by piece.

Bitcoin Tax Guide: Trading Gains And Losses - Fair Market Value

Related Articles
  1. Taxes

    Are There Taxes On Bitcoins?

    Here is a short guide to the tax implications when using or investing in bitcoins in the US.
  2. Small Business

    Bitcoin's Main Stumbling Block: Navigating The Law

    Coders created Bitcoin to be decentralized and independent of governments and banks. Authorities are still struggling to create a legal framework.
  3. Small Business

    What Bitcoin Regulations Look Like Around The World

    Bitcoin is still so new that countries are struggling to make legislation catch up with technology. Some nations are more open to virtual currency than others.
  4. Small Business

    Bitcoin Innovations And Obstacles

    Investopedia explains the development of the Bitcoin digital currency system and the risks associated with using and investing in it.
  5. Small Business

    How To Trade Forex With Bitcoin (XOM, EXPE)

    We look at ways to trade forex with bitcoin and the pitfalls in doing so.
  6. Small Business

    Countries Where Bitcoin Is Legal & Illegal (DISH, OTSK)

    Although bitcoin has been in existence for five years, most countries still do not have consistent laws regulating the cryptocurrency. However, a few countries have banned bitcoin altogether.
  7. Small Business

    If You Had Purchased $100 of Bitcoins in 2011

    Learn how an investment of $100 in bitcoin in 2011 would have performed over the years, and find out what your purchasing power would have been for each year.
  8. Small Business

    The Rise And Fall And Rise Of Bitcoin

    A look at the reasons behind the recent spectacular surge in bitcoin prices.
  9. Small Business

    Benefits & Risks of Trading Forex with Bitcoin

    Want to trade forex using bitcoins? Don’t jump on the bandwagon until you compare the risks to the benefits.
  10. Small Business

    Bitcoin ETFs: How Do They Work?

    ETFs offer a cost-effective, safe and hassle-free way to invest and trade bitcoins as stocks, without worrying about the security of digital wallets.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center