Bitcoin (BTC) is the most popular version of “cryptocurrency,” a term that also includes Litecoin (LTC), Ethereum (ETH), Monero (XMR), Ripple (XRP), and others. The word is a portmanteau that combines “currency” with “cryptography,” a sophisticated form of technology used to secure transactions and conceal sensitive information. While cryptography might make Bitcoin users harder to identify, it’s not a guarantee of anonymity – and in fact, the government has already taken steps to make finding Bitcoin miners and users easier. Why is this important from a tax perspective? Because with greater speed and ease than ever before, the IRS can now track down taxpayers who fail to report earnings (or losses) from Bitcoin and other digital currencies. If you need to report Bitcoin or other cryptocurrencies on your tax forms this year, ask the experienced Roseville Bitcoin tax accountants of Cook CPA Group about how we can help in a free consultation.
What Are Capital Gains and Losses?
Put succinctly, a “capital gain” is money you make by selling a capital asset. “Capital assets” include virtually every imaginable object of financial value, including:
- Your home
- Your car
- Your furniture
- Your valuable personal belongings, such as artwork, jewelry, or rare collectible items
If you profit by selling a capital asset – for instance, if you make $5,000 by selling your truck – you have realized capital gains.
Conversely, a “capital loss” occurs when a capital asset decreases in value. For example, if you sell your house for less than you paid when you originally purchased the property, you have realized capital losses.
Capital gains and capital losses can both be categorized as “short-term” or “long-term,” depending on how long the taxpayer holds the capital asset before selling it. While some exceptions exist, the rule of thumb is that gains or losses from capital assets held for over one year are considered “long-term.” Conversely, gains and losses from capital assets held for one year or less are deemed “short-term.”
Do I Have to Report Bitcoin Capital Losses to the IRS on My Tax Return?
Capital assets aren’t always tangible objects like buildings or vehicles. They can also include securities, such as stocks and bonds you might hold for investment. Because the IRS treats digital currencies like property rather than currency – a fact that rightfully confuses many people – Bitcoin and its competitors are subject to the same reporting rules as other capital assets, gains, and losses.
In short, the answer is yes: you must report Bitcoin capital losses (and Bitcoin capital gains) to the Internal Revenue Service. Indeed, failure to meet this requirement can have grave financial consequences.
How Do I Report Capital Gains and Losses from Cryptocurrency?
If you realized capital gains or losses from using or selling Bitcoins (or other cryptocurrencies), you must disclose the losses or gains to the IRS on your tax forms. The question is, how?
In this type of tax scenario, there are three main tax forms that you will be responsible for filing:
- Your federal personal income tax return. Depending on the taxpayer, this might refer to Form 1040, Form 1040-EZ, or Form 1040-A. While your federal tax return was due on April 17, 2018, you may have additional time to file if you applied for an extension, which would grant you until October 15, 2018.
- Schedule D. File Schedule D (Form 1040) (Capital Gains and Losses) by attaching it to your income tax return. It is due by the tax filing deadline. Part I of the form is used for reporting short-term capital gains and losses, while long-term gains and losses are reported in Part II.
Form 8949. Form 8949 (Sales and Other Dispositions of Capital Assets) should be filed with Schedule D. The form is essentially a chart which prompts taxpayers to list:
- Property descriptions
- Acquisition dates
- Dates of sale or disposition
- Sales prices
- Cost or other basis
- Adjustments to gains or losses, where applicable
- Gains or losses
California CPAs Offering Free Bitcoin and Cryptocurrency Tax Consultations
You can be heavily penalized for failing to report capital gains or losses from Bitcoin, Ethereum, or other digital currencies. These penalties, which are established in IRC § 6721 and other sections of the Internal Revenue Code, can wind up costing thousands upon thousands of dollars. You might be at risk for a tax audit – or even criminal prosecution.
Fortunately, you can avoid these penalties by complying with tax laws and making thorough, timely disclosures about your Bitcoin earnings and losses. The Roseville tax preparers at Cook CPA Group understand the unique tax rules that apply to cryptocurrency, and are ready to help you file your taxes, face an IRS audit, or plan tax strategies for the future.
To speak with an experienced member of our Sacramento CPA firm, contact us online, or call Cook CPA Group at (916) 910-0323. Your initial consultation is free of charge, so call today to discuss how we can help you resolve your Bitcoin tax questions.