There are a few key things to know about Bitcoin for tax purposes this year. First, if you’re new to cryptocurrency, the IRS considers it “property” and it is taxed when you cash out of Bitcoin you own, or when you trade or barter cryptocurrency for any good, service or non-currency property.
If you have owned your Bitcoin or other cryptocurrencies for less than one year when you cash out, trade or barter it, then you may have generated short-term capital gains, taxable as ordinary income. However, if you owned your Bitcoin or other cryptocurrencies for more than one year, then any increases would be treated as long-term capital gain. Tax rates on ordinary income and long-term capital gains vary greatly and will be affected by your overall filing status, total income and many other factors.
The recently passed Tax Cuts and Jobs Act closed a possible loophole that some people thought would defer having to recognize a taxable event and therefore income when they traded in Bitcoin or other crypto-currencies. The potential loophole involved the concept of “like-kind exchange”. Without going into the technical tax background, the Tax Cuts and Jobs Act clearly eliminates this loophole.
Like other investments, taxable events from Bitcoin or other cryptocurrencies should be reported on Form 8949 with your tax return. However, you will not receive a Form 1099 for a Bitcoin transaction, so it’s very important to keep your own records of all cryptocurrency transactions. The IRS is aware that very few people are currently reporting cryptocurrency transactions on Form 8949 so they are developing techniques to identify Bitcoin and other cryptocurrency taxable events and income. Normally, the IRS has three years to audit a taxpayer for unreported income. That timeframe can be extended for substantial understatement of income or tax fraud. The IRS is very good at figuring out when you have more income than you reported and they will come looking for it, so don’t take chances. Consult a tax attorney or CPA who is up-to-date on the laws involving cryptocurrency and the IRS to be sure you are fully compliant with these new and evolving rules.