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

Per Notice 2014-21, the IRS advises that capital gains and losses are dependent upon whether or not a “virtual currency is a capital asset in the hands of a taxpayer.” At the same time, however, consumers cannot set aside bitcoin wallets as “non-capital” accounts. The implication, therefore, is that bitcoin holdings which are placed in a wallet for any time period are, practically speaking, investments like stocks or bonds.

This is not, in and of itself, a problem for most bitcoin investors. The issues arise when those investors use their bitcoin holdings to make a purchase. Say Max uses bitcoin to buy a cup of coffee at a forward-thinking coffeeshop that accepts bitcoin payments; doing so would constitute a gain or a loss. A long-term holder who has seen their bitcoin value climb by many times as the price of the digital currency has risen could see a significant capital gain tax; perhaps 30 cents for a $2 cup of coffee.

The main issue for the average consumer who considers using bitcoin in day-to-day transactions is that there is currently no exemption for “de minimis” property gains or losses, like there would be for foreign currencies. This is the reason why a traveler can buy GBP for a trip to London, then claim a small percentage gain when exchanging them for U.S. dollars on the way back, without having to report that gain (unless it hits a $200 threshold in total gains). By contrast, the IRS requires that the bitcoin investor should keep a record of each incremental capital gain, making an aggregate via Form 1099-B to report come tax time.

It’s not difficult to see that this situation can get even more complicated. What happens if Max is at an evening out at a bar with friends? Should Max keep separate bitcoin wallets for his different regular purchases? Is it a wash sale if Max spends all of his assets on e-commerce sites that accept bitcoin and then buys additional bitcoin holdings?

Keith Aqui, the author of the IRS notice, suggested to the Wall Street Journal that the IRS was merely attempting to discourage tax evasion on major purchases, and that individual transactions like the ones illustrated above would not incur a penalty. Should the IRS eventually exempt de minimis bitcoin transactions from reporting, it would make the process of tax reporting for bitcoin users significantly easier, while allowing the IRS to nonetheless track and collect taxes on larger purchases. On the other hand, that would require Congress to step in. In late 2017, a bill suggesting just that set of exemptions was brought before Congress; the future of de minimis transactions remains unclear.

Next up, what about donations made in bitcoin or other virtual currencies?

Bitcoin Tax Guide: Donations
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