For workers, anything received as payment for goods or services, including Bitcoin or other digital currencies, is taxable income unless it is specifically exempted.
If you earn income in Bitcoin in the exchange of services with another person, this will be included in gross income and would be subject to income tax. These bitcoins could furthermore be subject to self-employment tax.
In some places, if you earn money by trading bitcoins or running an exchange, this could be included in gross income and treated as capital gains. This interpretation assumes bitcoins are used as a store of value like gold or another commodity. If treated as currency or debt, the gains could be taxed based on market value at the end of each tax year.
Some common sense assumptions about how Bitcoin will be regulated can be made by the nature of Bitcoin itself ‒ for instance, by tying the value of bitcoins to the local fiat currency. So when one receives a bitcoin, a note should be made of that coin’s USD value (or whatever currency) as a cost basis for tax reporting.
The existing framework applies to miners. Mined coins are recorded as income from mining and are taxable, and expenses are deducted. Many miners sell their bitcoins, and miners are taxed on the increase in Bitcoin value from the time the coins were mined and the value for which they sold. If this is a loss, then this loss can be declared.
In the United States, the IRS issued guidance for Bitcoin and other digital currencies in its March 2014-21 Notice. The IRS clarified its position on digital currencies, which it views as capital assets and thus subject to capital gains taxes. Trading and spending is a taxable event and capital gains must be calculated in USD.
The IRS also stated mined bitcoins are treated as immediate income at the market value of those mined coins on their date of mining.
“Most don’t know they can write off any losses they have,” said Libra founder Jake Benson. “The IRS allows you to offset income by up to $3,000 per year on capital losses. If you have losses and you aren’t writing them off, then it’s like throwing money away. Nobody likes doing taxes, but if you can owe less or increase your return, then doing your Bitcoin taxes often results in a benefit. In fact, the majority of our users are filing a capital loss, which means they’ve actually saved money by using our tool.”
Benson also gives insight for miners.
“Mining is considered income, so know the price of Bitcoin at the time you mined it,” he said. “If you make money on Bitcoin trading, the IRS requires that you report gains with line level detail.” The appropriate form for that is 8949, a sub-form of schedule D. Gains and losses, as outlined above, are treated like every other capital asset.
“Bitcoin cannot be considered a foreign currency by the IRS because it’s not legal tender and it’s not produced by a government,” he said. “Though it functions like a currency, the letter of the law is very clear.”
There have been numerous decisions by government bodies regarding the regulation of Bitcoin. For instance, the Commodity Futures Trade Commission ruled Bitcoin can be treated as a commodity. Commodities are taxed with 60/40 rules. Other capital assets, basic securities for instance, are taxed with short and long term rates.
“The IRS might need to issue another notice that clarifies which method to follow because taxpayers may get confused,” Benson noted. On a global level, some places are better than others when it comes to taxation. Benson cites Australia as one such region.
“Like Europe, there is a concept of Value Added Tax (VAT) called GST,” he said. “Without getting into too much detail, Australia’s tax authority decided that the GST applies to all sales of Bitcoin. That decision basically prevented any Bitcoin exchange from operating in Australia because they would be forced to apply a 10 percent markup on top of market price. Europe also has a concept of VAT, and a court there recently ruled Bitcoin would not be subject to VAT. This would have a huge impact on Bitcoin businesses that are involved with the purchase and sale of Bitcoin.” Benson notes, however, this is undergoing a change.
Few countries have outlawed Bitcoin. In some countries though, there is no tax applied to capital gains at all, which results in a essentially no tax obligations for owners or traders of Bitcoin. Benson believes regulators are investigating their options when it comes to the regulation and taxation of Bitcoin. In the UK, regulators determined VAT would not apply to Bitcoin sales.
“Probably closer than one would assume,” Benson noted. “An IRS agent was capable of tracing tumbled coins on the blockchain as evidence in the case regarding Carl Force from the DEA. He was sentenced to jail for six-and-a-half months. It’s quite common for individuals in the Bitcoin industry to villainize government, but I’ve observed that it’s also common for individuals to underestimate government prudence.”
There are some obstacles when it comes to filing Bitcoin taxes, Benson admits, such as the aggregation of transactional data. “Most people have more than one exchange account and more than a few wallets,” he said. “
In the future, Benson believes Bitcoin will treated similarly as today.
“Realistically, the same way it is now,” he said. “For perspective, it took the IRS 15 years to produce tax rules that applied to derivatives. If special guidance for digital currency is to ever come, I would predict at least a decade. Furthermore, you have cost basis reporting rules on fancy asset types that were only finalized in place about 3 years ago. If anything, I would guess the reporting requirements 10 years from now will be more than what they are today.”