Some Questions & Answers

Bitcoin and Taxes

First, tax regulations differ for each country around the world, so how Bitcoin is taxed in one country may not be the same elsewhere. Please look into the tax laws of your own country to find the specific details. What is pretty much global, is that buying Bitcoin or any other crypto-currency is not in itself taxable. However, you are likely to be taxed when you sell or even spend those coins and make a profit. How much depends on the amount of gains, how long you owned the coins and if and how your country taxes capital gains.

General

Capital Gains Taxes

Most countries consider Bitcoin and crypto-currencies as capital assets, and so any gains made are taxed like capital gains. So if you make profits from selling your coins, those profits are taxed. If you make losses, you may be able to deduct the losses and reduce your taxes.

What happens if I earned Bitcoins?

Most countries will also consider earning of crypto-currencies as a barter transaction or payment-in-kind. You are taxed as if you had been given the equivalent amount of your country's own currency. So, for example, say your salary was paid in part cash and part Bitcoin, and each month you received $1000 worth of Bitcoins, you are taxed like you had just received $1000. If you are paid wholly in Bitcoins, say 5 BTC, then you would use the fair value. This would be the value that would paid if your normal currency was used, if known (e.g. $1000), otherwise you would use the price of Bitcoin at the time to establish your taxable income.

Receiving tips or gifts

Laws on receiving tips are likely already established in your country and should be used if you are gifted or tipped any crypto-currency. You will similarly convert the coins into their equivalent currency value in order to report as income, if required.

Do I need to file or pay taxes if I own Bitcoins?

Not if you just bought Bitcoins (or any crypto-currencies) with your own money. However, if you traded, sold, or used any to purchase something, then you might. If you were given Bitcoins as payment, as a salary, or as a gift/donation, this is income and should be reported as any other income you earn.

I didn't move any money out of the exchange, I just bought back in. What about then?

Yes. A tax event occurred and you gained money, even though it isn't in your bank account. For tax purposes it is treated no differently.

The exchange doesn't have my details and so can't report me, should I still pay taxes?

If you made gains for which you are required to pay taxes in your country, and you don't, you will be committing tax fraud.

I bought some things with Bitcoins directly, do I owe taxes?

Probably, but depends on your country. If it's considered as a tax event, then you are essentially exchanging Bitcoins for goods or services. You may have gained in doing so, and therefore it has to be reported. Say you bought 1 BTC for $10. Now say that Bitcoin is worth $100 and you buy a $100 gift card. You got a $100 gift card for only $10. That $90 is gains and taxable.

So are you saying I have to report every thing I buy with Bitcoin?

Yes, if your country's tax authority has determined that gains are made when disposing of Bitcoins, like in the US for example.

What about if I bought some Ethereum or Litecoin?

Potentially another tax event. Think of it as selling Bitcoins back to cash, then buying your other coins with that. That sale might have gains, and so is treated the same way.

US Specific Tax Information

Where can I get real tax advice on Bitcoins?

You may find your accountant may not be too familar with Bitcoin. So we have put together a page of tax attorneys, CPAs and accountants who have registered themselves as knowledgable in this area and might be able to help.

How are the IRS treating Bitcoins?

The IRS produed guidance in 2014 on the specific treatment of Bitcoins and other crypto-currencies, which has helped clarified the situation. Essentially:

  • Bitcoin is a personal property, not a currency, and so is taxed as a capital asset
  • Gains made from converting Bitcoins into a fiat currency are subject to capital gains tax
  • Purchases of goods or services with Bitcoins must also account for gains
  • Bitcoins and other alt-coins obtained from mining is recognised income immediately at their fair value
  • Mining equipment can still be deducted as a legitimate business expense

Classification

The IRS are treating Bitcoin as property. Any gains made from the sale of personal property are subject to capital gains tax.

Tax Events

Tax is potentially due when a tax event occurs. For Bitcoin, this is whenever they are converted into fiat currency (e.g. US Dollars) or equivalent. This includes selling on an exchange, selling to another person, or buying goods or services.

Each taxable event may create a gain, and as such you need to know the date, cost basis, sale amount and any related fees.

Jurisdiction

All US citizens and residents are subject to a worldwide income tax. This means that where ever money is earned, what ever currency, it is taxable.

  • Any gains made from selling Bitcoins within any exchange are taxable
  • Any gains made from selling Bitcoins to any individual are taxable.
  • Any income of products or services purchased with Bitcoins are taxable.

Income from Bitcoin Sales

When Bitcoins are sold, the income it generates can be offset against their cost but any profit or losses are capital gains, which is taxable.

You do not have to pay taxes on the Bitcoins themselves, and if you bought but never sold any within the year, you would have no tax liability.

It is important to realize that the act of selling by trading is a taxable event, not when you transfer USD in or out of an exchange. Therefore you are required to keep records of all your trades as well as their initial cost, sale amount and fees. This, of course, is where it can gets complicated, especially if you have been playing the market and have numerous trades, as you would report the gains made for each individual trade.

The total gains and losses from all of your Bitcoin sells over the year will be accumulated and becomes your capital gain. This is then taxed appropriately.

Tax Rate

The rate you pay in taxes is determined by two factors:

  1. How long you held the coins
  2. Your ordinary tax rate

Gains made from assets bought and sold within a year or less are considered short term capital gains, and simply added to your income for tax purposes.

Gains made from assets bought and sold after a year are considered long term capital gains. Long term capital gains have different rates depending on your standard income rate, of 0%, 15% or 20% (if you are in the top income tax-bracket). Since this is less than your ordinary income tax rate, so is obvious that keeping coins for longer is preferable with regard to taxation.

Some examples,

Bill earns $60,000/year. He buys 1 Bitcoin for $10 on March 1, 2013 and sells it on November 29th, 2013 for $1,000. The cost basis of the coin was $10 with a 0.5% fee, $10.05. The sale income also had a 0.5% transaction fee, so was in total $995. Therefore his capital gain was $995 - $10.05 = $984.95. Since he owned the coin for a year or less, he reports short term capital gains on his tax return the following year. The gain is added to his existing income and is taxed at his ordinary tax rate of 28%, so he pays $984.95 * 0.28 = $275.79 in additional taxes.

Claire earns $30,000/year. She bought 1 Bitcoin for $5 on in September 2012 and sells it on November 29th, 2013 for $1,000. The cost of the coin was $5 with a 0.5% fee, $5.03. The sale income also had a 0.5% transaction fee, so was $995. Her capital gain was $989.97. Since she owned the coin for more than a year, she reports long term capital gains on her tax return the following year. Claire's ordinary tax rate is 15%, so her capital gains tax rate is 0%. She pays no taxes on the sale of her Bitcoin.

Income from Bitcoin Purchases

It is more complicated when Bitcoins are used to make a direct purchase. This is considered a barter transaction, the act of buying goods with something other than official currency.

You still have to calculate the gains that you made on the coins, because you are effectively converting them into currency or equivalent, and this is a tax event. You use the fair price of the goods or services you are acquiring as your sale proceeds for your coins.

As an example:

Bill owns 1 BTC that he bought for $100 with no fees in April 2013. He then buys a month's hosting from a website provider, and pays in Bitcoin. The vendor normally sells the hosting for $10 (incl tax) but Bill pays 0.02 BTC when the rate is $500/BTC. Bill's Bitcoins are nominally converted into the fair price of the hosting in dollars to calculate any gains for tax purposes. Therefore Bill has "sold" his 0.02 Bitcoins for $10.00, and this is recorded and used in calculating any gains he may have made. Since his Bitcoin cost $100 his gain is $10.00 - ($100 * 0.02) = $8.00

It is recommended you keep a record of any purchases, including the date, fair dollar value and amount in Bitcoins so you can report them if required.

Wash Sales

If you buy and sell stocks or securities, any capital losses you make are subject to wash sales. A wash sale occurs when you make sell at a loss but have bought a replacement stock within a 30-day window before or after the date of the sale. If the sale is determined to be a wash sale, you cannot deduct the loss within that tax year. Instead the cost basis is added to the replacement stocks. Wash sales are enforced to stop people from making a sale and taking the losses within one tax year, but buying back into the stock soon after and so continuing to hold.

There is debate if wash sales are appropriate to Bitcoins. On one hand, since wash sales were designed to ignore "fake" losses they could equally apply to Bitcoins, which can be traded in a similar fashion. However, the IRS specifically state that wash sales only apply to stocks and securities, and so are not applicable to personal capital assets. To be prudent you might want to consider applying wash sales rules to your trades. You should consult your CPA for further advice on whether to apply the wash sales to your trades.

Record Keeping

No matter how you spend your Bitcoins, it would be wise to keep detailed records. If you are audited by the IRS you will likely have to show this information and how you arrived at figures from your specific calculations. Given that no absolute information has been given, filing in good faith with detailed record-keeping will be evidence of your activity and your best attempt to report your taxes correctly. If you don't have this information, the IRS might take a hard line and consider your Bitcoins as income, rather than capital gains, and a zero cost if you cannot show when you bought them.

Bitcoin.Tax Website

Does this website only work on Bitcoins?

No, it works for any crypto-currencies, like Bitcoin, Bitcoin Cash, Ethereum, Litecoin, any others.

How do I get my trade data?

Many exchanges provide an export capability, so you can log into your account and download a comma-separated file of your data. You can then import that into Bitcoin.Tax and we'll do the rest.

Some exchanges don't provide a way to export your data but do have an API, so so we'll use that if we can. Unfortunately it may need some setting up on your part. Please see instructions for each exchange.

Which exchanges do you support?

We evaluate and update our supported exchanges as necessary. Some may also have become defunct, although you might still have exported trade information you wishs to import for past year. At this time,

  • Binance
  • Bitfinex
  • Bitstamp
  • Bittrex
  • CampBX
  • CEX.IO
  • Circle
  • Coinbase
  • Gemini
  • GDAX
  • HitBTC
  • Kraken
  • LocalBitcoins
  • Paxful
  • Poloniex
  • VirWox
  • Wex (BTC-e)

There is also a general CSV import feature that can be used to import from other exchanges. You may have to copy the trade data from the website and put it into a spreadsheet and converted into our standard format.

Please contact us if there is an exchange that has an export that you'd like us to add. We'll look into it.

I don't want to give you any personal information

All we require is that you login with an email address or an associated Google account. We really don't know anything else about you. If you decide to upgrade, you can even pay anonymously with Bitcoin or use a credit card. Our card processor, Stripe, does a fraud check on your address but we do not store those details. Once you are done you can even close your account and we delete everything about you.

Do you report my capital gains to the IRS?

No. We aren't a tax preparation service, just a tool to help you do your own taxes.