The IRS want their Bit of the Coin

Bitcoin has become increasingly popular since its creation a few years ago. Many individuals holding this cryptocurrency have seen its value increase significantly. Many are confused around the tax treatment, given the fact that very little tax advice has been given by experts in cryptocurrencies.

From the IRS’s perspective the US taxation treatment of bitcoin depends primarily on how it was acquired.

Often bitcoin is acquired through purchase of the cryptocurrency as an investment in the hope its value will increase over time. In this scenario the tax treatment on sale depends on the length of time bitcoin is held (i.e. taxable as ordinary income at ordinary income tax rates unless held for more than a year in which case long term capital gain tax rates apply). In this case any gains recognised are also likely to be subject to NIIT (Net Investment Income Tax) at a rate of 3.8%. If sold at a loss, bitcoin losses are tax deductible and can be used to offset other income (up to certain limits).

For those individuals, who acquire bitcoin in the form of remuneration for services rendered, the IRS require them to recognise the value of the cryptocurrency in $dollars as a part of their gross income.

Any bitcoin that has been mined is realised as gross income measured at market value at date of mining (bitcoin mined as a part of a trade or a business activity may also be subject to Self-Employment tax).

For individuals looking at exchanging cryptocurrencies, IRS s.1031 ‘like-kind’ exchange provisions are unlikely to apply….so not possible to defer recognition of income.

Also, please do not forget to consider the FinCEN 114 and Form 8938 reporting requirements around bitcoin.

Get in touch with one of our tax experts today, for more information.