Virtual currency like Bitcoin has shifted into the public eye in recent years. Some employees are paid with Bitcoin, more than a few retailers accept Bitcoin as payment, and others hold the e-currency as a capital asset. Recently, the Internal Revenue Service (IRS) clarified the tax treatment of virtual currency transactions.
Key Takeaways
- If you are an employer and pay employees using Bitcoin, you are required to report employee earnings to the IRS on W-2 forms, using the U.S. dollar value of each Bitcoin payment on the date it was made.
- If you are an employee, you report your total W-2 wages in U.S. dollars, even if some or all of your wages were paid with Bitcoin.
- If you are self-employed and receive payment with Bitcoin, you are required to report all income in U.S. dollars, using the U.S. dollar value of each Bitcoin payment on the date it was received.
- If you “mine” Bitcoin, you’ll report the gross value of these earnings as income on your taxes, based on the U.S. dollar value of the virtual currency on the day the payment was received.
Convertible virtual currency is subject to tax by the IRS
Bitcoin is the most widely circulated digital currency or e-currency as of 2023. It's called a convertible virtual currency because it has an equivalent value in real currency. The sale or exchange of a convertible virtual currency—including its use to pay for goods or services—has tax implications. The IRS answered some common questions about the tax treatment of virtual currency transactions in its recent IRS Revenue Ruling 2019-24and itsFrequently Asked Questions article. Tax treatment depends on how a virtual currency is held and used. Below are some tips using Bitcoin as an example:
Bitcoin used to pay for goods and services taxed as income
If you are an employer paying with Bitcoin, you are required to report employee earnings to the IRS on W-2 forms.
- You must convert the Bitcoin value to U.S. dollars as of the date each payment is made and keep careful records.
- Wages paid in virtual currency are subject to withholding to the same extent as dollar wages.
Employees are required to report their total W-2 wages in dollars, even if earned as Bitcoin. Self-employed individuals with Bitcoin received as income also must convert the virtual currency to dollars as of the day received, and report the figures on their tax returns.
TurboTax Tip:
When you hold Bitcoin, it is treated as property for tax purposes. As with stocks or bonds, any gain or loss from the sale or exchange of your Bitcoin assets is treated as a capital gain or loss for tax purposes.
Bitcoin held as capital assets is taxed as property
When you hold Bitcoin it is treated as a capital asset, and you must treat them as property for tax purposes. General tax principles applicable to property transactions apply. Like stocks or bonds, any gain or loss from the sale or exchange of the asset is treated as a capital gain or lossfor tax purposes.
Bitcoin miners are required to report receipt of the virtual currency as income
Some people "mine" Bitcoin by using computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger.
According to the IRS, when a taxpayer successfully “mines” Bitcoin and has earnings from that activity whether in the form of Bitcoin or any other form, they have to include it in gross income after determining the fair market dollar value of the virtual currency as of the day it is received. If a bitcoin miner is self-employed, gross earnings minus allowable tax deductions are also subject to the self-employment tax.
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FAQs
The IRS treats cryptocurrency as “property.” If you buy, sell or exchange cryptocurrency, you're likely on the hook for paying crypto taxes. Reporting your crypto activity requires using Form 1040 Schedule D as your crypto tax form to reconcile your capital gains and losses and Form 8949 if necessary.
Do you have to pay taxes on virtual currency? ›
The IRS treats cryptocurrencies as property for tax purposes, which means: You pay taxes on cryptocurrency if you sell or use your crypto in a transaction, and it is worth more than it was when you purchased it. This is because you trigger capital gains or losses if its market value has changed.
What are the IRS rules for Bitcoin? ›
If an employee was paid with digital assets, they must report the value of assets received as wages. Similarly, if they worked as an independent contractor and were paid with digital assets, they must report that income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).
How to report virtual currency on tax return? ›
Frequently asked questions. Any cryptocurrency capital gains, capital losses, and taxable income need to be reported on your tax return. You can report your capital gains and losses on Form 8949 and your income on Form 1040 Schedule 1 or Schedule C depending on your situation.
What are the tax implications of owning Bitcoin? ›
The IRS generally treats gains on cryptocurrency the same way it treats any kind of capital gain. That is, you'll pay ordinary tax rates on short-term capital gains (up to 37 percent in 2023 and 2024, depending on your income) for assets held less than a year.
How to avoid paying taxes on crypto? ›
9 Ways to Legally Avoid Paying Crypto Taxes
- Buy Items on BitDials.
- Invest Using an IRA.
- Have a Long-Term Investment Horizon.
- Gift Crypto to Family Members.
- Relocate to a Different Country.
- Donate Crypto to Charity.
- Offset Gains with Appropriate Losses.
- Sell Crypto During Low-Income Periods.
A digital asset that has an equivalent value in real currency, or acts as a substitute for real currency, is referred to as convertible virtual currency, for example, a cryptocurrency. It can be: Used to pay for goods and services. Digitally traded.
How does the IRS know if you have Bitcoin? ›
1. Can the IRS track crypto? Yes, the IRS can track crypto as the agency has ordered crypto exchanges and trading platforms to report tax forms such as 1099-B and 1099-K to them. Also, in recent years, several exchanges have received several subpoenas directing them to reveal some of the user accounts.
What is the new tax law for Bitcoin? ›
As of 2024, this annual gift tax exclusion amount is $18,000 per recipient. If the value of the cryptocurrency gift exceeds this exclusion amount, the donor is required to report the gift on Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return.
Do you have to pay taxes on Bitcoin if you don't cash out? ›
As long as you hold digital assets you purchased with fiat currency without converting them into cash or other crypto, you are not required to report or pay taxes on any potential gains to the IRS.
You can send any of your crypto between your personal wallets without paying any taxes; Even if you don't sell any of your crypto, you'd still need to answer the crypto question on Form 1040, including reporting your crypto income in your income tax return.
What happens if I don't report crypto on taxes? ›
US taxpayers must report any profits or losses from trading cryptocurrency and any income earned from activities like mining or staking on tax return forms, such as Form 1040 or 8949. Not reporting can result in fines and penalties as high as $100,000 or more severe consequences, including up to five years in prison.
Which crypto exchanges do not report to the IRS? ›
Some cryptocurrency exchanges do not report user transactions to the IRS, including: Decentralized crypto exchanges (DEXs) like Uniswap and SushiSwap. Some peer-to-peer (P2P) platforms. Exchanges based outside the US that do not have a reporting obligation under US tax law.
How much Bitcoin do I have to report on taxes? ›
You owe taxes on any amount of profit or income, even $1. Crypto exchanges are required to report income of more than $600, but you still are required to pay taxes on smaller amounts. Do you need to report taxes on Bitcoin you don't sell? If you buy Bitcoin, there's nothing to report until you sell.
Is Bitcoin a tax write off? ›
Yes, you can write off crypto losses on taxes even if you have no gains. If your total capital losses exceed your total capital gains, US taxpayers can deduct the difference as a loss on your tax return, up to $3,000 per year ($1,500 if married filing separately).
How to convert Bitcoin to cash? ›
Here are five ways you can cash out your crypto or Bitcoin.
- Use an exchange to sell crypto. One of the easiest ways to cash out your cryptocurrency or Bitcoin is to use a centralized exchange such as Coinbase. ...
- Use your broker to sell crypto. ...
- Go with a peer-to-peer trade. ...
- Cash out at a Bitcoin ATM.
The number of states taxing digitally or electronically transferred goods is expanding. Currently, approximately 25 states apply sales tax to digital books, downloaded music, and even ringtone.
Is virtual currency considered money? ›
If something is generally accepted as a means of exchange, a store of value, or a unit of account, it is considered by most to be money. Virtual money can meet this definition, but not always. For example, virtual money earned in a video game used to purchase in-game items is likely not real money.
Do you have to report crypto under $600? ›
You owe taxes on any amount of profit or income, even $1. Crypto exchanges are required to report income of more than $600, but you still are required to pay taxes on smaller amounts. Do you need to report taxes on Bitcoin you don't sell? If you buy Bitcoin, there's nothing to report until you sell.
