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

Years ago, the IRS’s vague definition of taxable virtual currencies likely helped some investors and miners avoid reporting certain required transactions. From the 2015 tax year, only 802 people involved with bitcoin trades through Coinbase reported gains and losses; during the period from 2013 to 2015, though, the cryptocurrency rose from $13 per coin to more than $1,100 each (the IRS subsequently announced a large-scale investigation into Coinbase customer accounts, but then later scaled back the investigation to only focus on large transactions of $20,000 or more.


The IRS initially made use of a distinction from the Financial Crimes Enforcement Network’s guidance in order to separate out common “convertible” digital currencies like bitcoin from other cryptocurrencies. This meant that only convertible digital currencies (those with an “equivalent value in real currency, or [which act] as a substitute for real currency” would be considered taxable.


So what makes a digital currency convertible? By one approach, a virtual currency which (in the language of the IRS) is “listed on an exchange and the exchange rate is established by market supply and demand” would be considered convertible to a “real currency” such as the U.S. dollar. What about those digital currencies which may only be available on offshore exchanges (and thus only convertible to other digital currencies like bitcoin) would qualify as taxable. The IRS has suggested that it will tax gains on successful convertible virtual currencies retroactively, so our example investor may be able to bypass tax reporting for now, only to find that he must report transactions in the future, once the U.S. government decides those exchanges or their currencies are within these boundaries.


By another approach, convertible digital currencies are those which investors can use to buy something tangible; alternately, convertible currencies are those for which the value is driven by speculation. The IRS stipulated that “the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.” What about the implications for a brand new cryptocurrency which has not been demonstrably valuable in commerce? Even major currencies in the digital currency space are uncommonly used in real-world transactions of this type.


Next, we’ll examine how the ways that cryptocurrency investors can calculate their cost bases make the situation even more complicated.



Bitcoin Tax Guide: Trading Gains And Losses - LIFO, FIFO, Offsetting Lots
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