Bitcoin, crypto, virtual currency — the next big evolution in currency and how it’s used to buy, sell and trade is here, and here to stay. Whether you’re already a well-seasoned crypto user or a verifiable newbie, there’s a bit of a thrill and mystique attached to using and trading Bitcoin.
That is, until the inevitable occurs and the boring, tedious underbelly of any paper chase reveals itself — filing and reporting taxes on your assets and earnings. On top of being a chore, filing your taxes can be downright stressful. And doing your taxes properly becomes even more difficult when you have any sort of complicated tax situation like reporting income from your investments, including Bitcoin.
But if you’re using Bitcoin or interested in it, we’ll hedge our bets that you’re not one to shy away from something rewarding because it’s a little challenging. You don’t have to go it on your own, either. Combine Benzinga’s guide to paying taxes on Bitcoin with the professional guidance of our expert partners and you have a solid set of resources in your corner.
Do You Have to Pay Taxes on Bitcoin?
With few exceptions, you do have to pay taxes on Bitcoin. Think of it this way: If your Bitcoin activity includes or results in what is known as a taxable event, you’re liable for taxes. Any situation in which you realize income is a taxable event.
So, this means exchanging Bitcoin to fiat currency (currency tethered to a value set by a certain government) or trading Bitcoin for another currency is a taxable event. Purchasing goods or services with Bitcoin is a taxable event, as is earning any crypto income.
To explain a bit further, the Internal Revenue Service (IRS) designated virtual currency as property for federal tax purposes. Stocks, bonds and real estate investments carry the same type of tax liability. When you dispose of, trade or sell your Bitcoin, the capital gains or losses from these exchanges are taxed at your tax bracket percentage rate.
Bitcoin you earn as income is also taxed. If your employer pays you in Bitcoin, if you are a freelancer or independent contractor who is paid in Bitcoin or you accept Bitcoin as payment for goods or services you’re selling, this is likely considered income by the IRS. You’ll pay income tax on how much your virtual currency is worth in U.S. dollars (USD).
How to Pay Taxes on Bitcoin
How do you actually pay taxes on Bitcoin? The simple answer is that you report your crypto trades on IRS Form 8949, the same tax form you’d file to report any gain or losses resulting from the buying and selling of capital assets.
The slightly more complicated answer is you need the following information to properly fill out your Form 8949:
- A record of all of your cryptocurrency trades, sales and disposals
- Date for each crypto acquisition
- Date of all trades and sells
- The Fair Market Value of your proceeds
- Your cost basis method (more on that later)
- Any gains or losses for the trade
If this sounds like a lot to keep a record of, well, it is. That’s why so many solid resources for filing bitcoin taxes are popping up as companies rush to fulfill the needs of crypto traders trying to adjust to ever-evolving standards governing virtual currency.
Luckily, as cryptocurrency becomes an increasingly popular form of currency, a set of best practices is forming around how to properly track and report Bitcoin taxes.
Like other potentially complicated tax situations, you’ll want to keep careful records of the Bitcoin you trade and earn. This means tracking Bitcoin you receive as payment for work — even if you don’t receive a tax report from your employer.
You have to track and report your capital gains and losses from trading Bitcoin. To do this, you have to choose a cost base method, or the way you calculate your gains and losses, along with keeping records of the fair market value and gain or loss (in USD) when you buy, sell or trade Bitcoin.
Best Online Tax Platforms for Crypto
An entire financial industry is sprouting up rapidly around virtual currency, complete with the heroes of tax season: virtual e-filing platforms that specialize in crypto. Take a look at our picks for the best online tax platforms for crypto.
Keeping a record of your trade history is a must, but it’s not an easy undertaking. TradeLog’s digital tax preparation software is specifically designed for active traders and investors. One of its most useful features is the ability to record, track and manage your complete trade history, including Bitcoin trades, for the entire tax year.
TradeLog takes your trade history and does the hard work for you, creating a ready-to-file tax report. Not only will it create your Form 8949, it comes ready for export to e-filing services like TurboTax. Also, it will integrate with Broker 1099-B reports if necessary, which is the report for broker trading.
TradeLog’s software deftly handles wash sale rules for taxpayers, a huge benefit to active traders and investors. While wash sales are sometimes inevitable, the TradeLog software helps you avoid wash sales with hefty tax consequences all year (not just during tax season) and helps you hone your own trading strategy.
TradeLog has a whole roster of trader-specific tax services addressing complex tax situations often left out by more traditional tax preparation software. Check them out here. Or try out its free 30-day trial to get a feel for TradeLog yourself.
A user friendly platform with support to more than 7500 tokens and over 300 wallets and exchanges via CSV, API or direct connect. The ultimate tax platform for every level of crypto trading: from HODLers to High Frequency Traders. If based in the US, generate your form 8949 without a hassle or import your tax report directly to TurboTax.
We offer an easy-to-use platform with a 365-day license allowing you to generate as many tax reports as you want. ACCOINTING.com also offers an app and a dashboard to track your portfolio…anytime…anywhere.
If you’re looking for a straightforward, trustworthy way to accurately report your bitcoin taxes, look no further than CryptoTrader.Tax. It’s a streamlined, easy-to-use platform that demystifies filing your bitcoin taxes.
In only 3 steps, CryptoTrader.Tax can compose a reliable, accurate tax report in just minutes. It’s super simple: Import your trade information, add your crypto income date and viola — your tax report is ready for download and to be filed with the IRS. The CryptoTrader.Tax software even integrates with TurboTax and TaxAct, so you can e-file your crypto tax report with the rest of your taxes.
CryptoTrader.Tax works with every crypto exchange, meaning importing your trades using the Generic CSV Import template from another crypto platform is a smooth, uncomplicated process. And you can count on tax-professional level expertise — your crypto taxes are calculated using tried-and-true methods that reduce your tax liability and ensure accuracy.
CryptoTrader.Tax offers 4 subscription packages, although you can start your tax report for free. Subscriptions range from $49 to $299 per tax season. The main difference among packages is the number of trades you can report:
Hobbyist includes up to 100 trades
- Day Trader includes up to 1,500 trades
- High Volume Trader includes up to 5,000 trades and priority customer support
- Unlimited includes unlimited trades and priority support
All packages include live support, free report previews, unlimited report revisions, IRS Form 8949, a capital gains report, TurboTax and Tax Act integration and tax loss harvesting.
Trader’s Accounting is an accounting and tax preparation firm specializing in financial services dialed in to the needs of active traders. Its expertise includes Bitcoin-specific tax considerations, which protects clients from incurring further tax liabilities by incorrectly filing taxes on Bitcoin.
Trader’s Accounting offers a wide range of incredibly useful services for active traders. In addition to comprehensive tax preparation services for individual traders, it offers services to business entities. Additionally, Trader’s Accounting will consult with you to design a day trading tax strategy that works with existing tax laws to maximize your returns and minimize tax obligations.
If you recently quit trading and need guidance to dissolve your entity, Trader’s Accounting can take care of that, too. It also offers prepaid bookkeeping for 12 or more months to help you track your finances.
Trader’s Accounting offers a free half-hour consultation to new clients. Get in touch with them today to schedule yours!
TaxBit connects you to enterprise cryptocurrency tax experiences. Whether you need to issue 1099s or report your own taxes, TaxBit’s cryptocurrency tax software unifies the process.
It connect the processes of producing and issuing 1099s with other data into completed tax reports that are ready to file. TaxBit Consumer and TaxBit Enterprise interact, so you have a seamless tax experience across all of the platforms you use.
TaxBit’s APIs make it easy to automatically bring in your data. Whether you are interacting with its tax center suites on an exchange or using TaxBit Consumer, you’ll see the real-time tax impact of your transactions across any exchange you trade on.
Bitcoin Tax Law Summary
To refresh, let’s go over the general rules of Bitcoin tax laws. The IRS outlines these tax consequences for virtual currency and its use in IRS Notice 2014-21.
Bitcoin is considered property for federal tax purposes. It may also be considered a form of income. Thus, any capital gains or losses you incur when you buy, sell or dispose of Bitcoin are subject to a tax penalty. This tax penalty is a percentage set at your personal tax rate. Also, Bitcoin is subject to income taxes when appropriate. If you are paid in Bitcoin to do a job or for something you’re selling, you are typically subject to income taxes.
You are not subject to taxation when you buy and hold crypto, or when you transfer the same crypto from one of your accounts to another account.
Work Smarter, not Harder with a Digital Bitcoin Tax Preparer
The goal of making any investment is usually to see some kind of return — and while we wish you only the biggest, most tax minimized returns possible, accurately tracking and reporting your Bitcoin income is definitely a huge part of achieving this.
With a complex tax situation you should consult a bonafide tax professional to make sure you’re taking the right steps. Get in touch with any of the partners on our list today to get connected to expert advice and digital tax preparation resources and software.
Remember, tax avoidance is a criminal offense. Always seek professional, legal advice before redeeming gains in cryptocurrencies.