Jake Benson, founder of LibraTax for UpStart Biz Journals writes: The UpTake: Taxes have always been a burden, but in the age of bitcoin, they can seem outright impossible. One bitcoin founder whose company helps with bitcoin taxes, share the ins and outs of what it takes to file in your cryptocurrency taxes.
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he more ways you use bitcoin, the harder it gets to account for. That's partly due to the fact that it's classified as 'property' by theIRS. So while bitcoin functions much like a currency for its users, the tracking and reporting requirements are more akin to trading stock. Just like stocks, a taxpayer has to recognize the value on receipt and the value upon disposal and report the difference.
So, if you're one of those taxpayers who had bitcoin on the balance sheet last year, get ready: this will be the first tax season where the IRS will be paying attention to digital currencies.
To illustrate just how difficult the situation is, I'll provide a simple eight transaction example of basic bitcoin usage. In the slideshow at the top of the page (launch it by clicking on the first photo) is a theoretical history of my bitcoin transactions. This is the basic information one can retrieve from the 'blockchain.'
In all of this, you'll need to do more than just provide the basic information that a transaction occurred. You'll also need to categorize them by transaction type and taxable event (note, anytime you buy anything with bitcoin, it is equivalent to a sale of bitcoin for the price of the good purchased).
You also need to figure out what the dollar value of each transaction was. Given the fluctuations in bitcoin prices over the past year, this can be tricky. If you don't have it recorded somewhere, you have to look it up.
Once you've got all your data in place, it's time to satisfy the IRS. The revenue agency will require you to fill out tax form 8949, which is similar to 'Schedule D' for those familiar with reporting capital gains and losses on stock. You will also have to include any bitcoin income or bitcoin donations on the respective tax form.
For a better sense of what a bitcoin transaction flow looks like, check out the slideshow. One thing: I have not illustrated the issue of long-term gain versus short-term gain, which adds almost another magnitude of difficulty. Basically, if a bitcoin is more than one year old when it is sold, that gain/loss is categorized separately and taxed at a lower rate.
This, hopefully, has given you a better sense of how the federal government is watching you're bitcoin and how you should report it. Doing it yourself isn't impossible, but with all the steps needed to figure out the valuation, it's not easy.
The difficulty of tracking bitcoin is one reason I created LibraTax, software designed to address the unique characteristics of digital currency and blockchain technology and make the accounting of it easy to handle.
But whether you do it yourself or use my product or someone else's, the biggest takeaway is that you have to be prepared to satisfy the IRS.
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