Bitcoin (BTC) is a type of “cryptocurrency,” also known as “virtual currency” or “digital currency.” While many types of cryptocurrency have been introduced in recent years, such as Litecoin (LTC) and Ethereum (ETH), Bitcoin has risen to prominence over its competitors, becoming the best-known and most widely-used cryptocurrency among California residents. Thanks largely to huge spikes in value during late 2017 – a trend which has since reversed course – Bitcoin has generated plenty of interest since its debut in 2009, not only among everyday citizens, but also within the IRS. In a time where the Internal Revenue Service is cracking down on crypto by allocating resources toward subpoenas and task forces, it’s important to understand how Bitcoin is taxed and when it must be reported. In this article, our Bitcoin tax accountants will examine whether Bitcoin is taxed as property or income in California.
Is Bitcoin Considered Property or Currency?
Bitcoin was first introduced in 2009. Though attributed to an unknown person or entity called “Satoshi Nakamoto,” it has never been confirmed whether Bitcoin’s inventor was a group of people or an individual acting alone.
Since its introduction a decade ago, Bitcoin has experienced dramatic turbulence. From humble beginnings – a mere $0.008 per coin – Bitcoin skyrocketed to a record high peak value of $19,783.06 in December 2017, before losing substantial worth again. With 2018 now drawing to a close, Bitcoin’s value has been hovering around the $4,000 mark.
In 2014, the IRS issued Notice 2014-21: the first regulations addressing the taxation of Bitcoin and other cryptocurrencies. These regulations state the following:
“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”
Unfortunately for taxpayers, the threadbare regulations contained in Notice 2014-21 – a document which is only six pages long – have likely created more questions than answers since their initial release. This lack of detail or consistency has led a series of other agencies and organizations, including the American Institute of CPAs, to make their own regulatory recommendations to the IRS concerning the treatment of cryptocurrency like Bitcoin.
How is Bitcoin Taxed by the IRS?
For most users, one of the most attractive features of Bitcoin is the relative anonymity it grants. However, the key word here is “relative.” Despite sophisticated encryption technology, Bitcoin transactions are not invisible to the IRS. On the contrary, the IRS has already succeeded in forcing Coinbase, one of the largest and most popular cryptocurrency exchanges, to turn over thousands of records detailing Coinbase user activity. This victory will likely not be the IRS’ last.
The takeaway message is that the IRS takes cryptocurrency seriously, especially due to the potential for tax evasion, money laundering, and other financial crimes. Taxpayers need to take cryptocurrency seriously, too – and that means complying with IRS Bitcoin reporting requirements. So what do those requirements demand?
As you already know, federal law requires taxpayers to report income that surpasses reporting thresholds. For instance, for 2018 tax returns, there is a $12,000 filing threshold for single filers who were under the age of 65 when 2018 ended. In addition to income, taxpayers are also required to report “capital gains,” which are financial gains that result from the sale of “capital assets” like homes, vehicles, stocks, or precious works of art.
These rules don’t just apply to salaries, wages, tips, or commissions – they also hold true of Bitcoin. If you were paid in Bitcoin, or realized capital gains by selling Bitcoin (or other virtual currencies), you must report the income and gains to the IRS, provided they meet the applicable reporting thresholds.
Additional offshore reporting requirements might arise depending on whether the Bitcoin is being held in a foreign country. If so, the taxpayer may need to:
- File an FBAR. An FBAR is a Foreign Bank Account Report, otherwise known as FinCEN Form 114. You must file an FBAR if you had a foreign account, including a foreign Bitcoin account, whose value surpassed $10,000 during any point in the tax year.
- File Form 8938. Taxpayers use Form 8938 to report specified foreign financial assets. This requirement is similar to the FBAR requirement, but has a higher reporting threshold ($50,000). Even if you file Form 8938, you may need to file a separate FBAR in addition. An experienced tax accountant can help you understand whether these requirements affect you.
Schedule a Bitcoin Tax Consultation with a CPA for Cryptocurrency in California
In March 2018, the IRS issued a public notice “remind[ing] taxpayers to report virtual currency transactions.” In this notice, the IRS stated the following: “Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest.”
Do not risk a needless tax audit – or worse – by attempting to conceal Bitcoin transactions from the IRS. Instead, work with a Roseville tax preparer who is highly experienced in cryptocurrency tax regulations, like Evelyn Cook of Cook CPA Group. Our dedicated accountants can help you comply with Bitcoin tax filing requirements, reducing the risk of IRS audits, penalties, and interest charges. To set up a free consultation, contact Cook CPA Group online today, or call (916) 910-0323.