Tax Day 2018 is coming up in less than a month. Unless you filed Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return), the 2018 deadline for filing a federal personal income tax return is Tuesday, April 17. Make sure you’re prepared by understanding your reporting requirements. For example, you already know that you have to report your U.S. and foreign income – but were you aware that you may also need to report income earned through cryptocurrency, such as Bitcoin, Ethereum, Ripple, Dash, or Litecoin? If you were paid in Bitcoin or other digital currencies this year, continue reading to learn more about reporting cryptocurrency income to the Internal Revenue Service (IRS). Then, contact our Bitcoin tax accountants to schedule a free cryptocurrency tax consultation.
How to Report Bitcoin Earnings and Cryptocurrency Income on Your Tax Return
Cryptocurrency has been a hot tax topic during the past few years. In 2016, a legal battle erupted between the IRS and Coinbase, a leading digital currency exchange, culminating in a court decision to let the IRS access roughly 14,350 user accounts. During 2017, Congress held hearings and introduced bills that would increase regulation of virtual currencies, which some government officials have linked with money laundering, the financing of terrorism, and other serious offenses.
While many have argued that increased government oversight will increase transparency and distance the crypto industry from organized crime, there could also be a drawback for taxpayers: a new set of reporting requirements to worry about on Tax Day. To make matters even more difficult for taxpayers who are simply trying to comply, the IRS has issued scant guidance on the taxation of cryptocurrency. Many areas of the existing guidelines remain ambiguous or underdeveloped, heightening the confusion.
The good news is that taxpayers needn’t struggle with reporting questions on their own. If you earned Bitcoin income or other cryptocurrency income in California last year, look to Cook CPA Group for Roseville tax preparation services with a focus on digital currency.
There are two basic sources of Bitcoin income. One or both may apply to you, depending on your situation:
- You might have been paid in Bitcoin by your employer.
- You might have used computer software to mine Bitcoin yourself.
Either way, if you had Bitcoin income in 2017, you must report it to the IRS on your tax return, just as you would report wages or salary paid in traditional fiat currency like USD. However, this task can become rather complicated for Bitcoin miners, because before you can add Bitcoin to your gross income, you must figure out what the fair market dollar value of the cryptocurrency was on the date you mined it. The rules become even more complex if you are a self-employed Bitcoin miner, because your gross income will be affected by self-employment tax (pertaining to Medicare and Social Security), notwithstanding any deductions for which you qualify.
Before you contact a Bitcoin CPA or tax preparer for assistance, try to gather as many financial documents as you can. For example, you might have received Form 1099-K (Payment Card and Third Party Network Transactions) from a cryptocurrency exchange if your transactions exceeded certain thresholds. Coinbase, for instance, will generally issue a Form 1099-K to a United States-based user who made at least 200 transactions during a one-year period totaling $20,000 or more in cash. You should also have received a Form W-2 (Wage and Tax Statement) from your employer.
Once you have compiled all the documents you need, it’s time to report your Bitcoin income. Cryptocurrency income is reported to the IRS using Schedule D (Capital Gains and Losses), which you should attach to your income tax return, or Form 1040. Depending on whether you held the Bitcoin for more or less than one year, it will be taxed as either a short-term capital gain (which is taxed like regular income) or a long-term capital gain (which has a more favorable tax rate).
Keep in mind that, beyond reporting ordinary income or capital gains, you may be subject to additional reporting requirements depending on whether your Bitcoin account or wallet is stored overseas. Like other offshore income and assets, foreign Bitcoin income must be disclosed by filing an FBAR (Report of Foreign Bank and Financial Accounts), also known as FinCEN Form 114, if its value exceeded $10,000 at any time during the year. If the FBAR requirement applies to you, you are likely also obligated to file Form 8938 (Statement of Specified Foreign Financial Assets). Further, Bitcoin income may be subject to California state taxes.
Our Roseville, CA Business Accountants Can Help with Cryptocurrency Tax Issues
If these reporting requirements sound overwhelming, don’t panic: let the knowledgeable cryptocurrency CPAs of Cook CPA Group handle the tax work for you. Our skilled team of tax professionals is well-versed in evolving cryptocurrency laws, and can work diligently to help you maintain or reenter compliance. We represent individual taxpayers and business entities, including corporations, limited liability companies (LLCs), and partnerships.
Don’t be surprised with costly penalties – or worse, a criminal investigation – because of a preventable error on your tax forms. For Bitcoin tax help you can trust, contact Cook CPA Group online, or call our team of Roseville tax accountants at (916) 724-1665 for a free Bitcoin consultation.