Remember when Bitcoin was new and strange and even a little bit weird? It wasn’t that long ago. The cryptocurrency that started it all was first released as open-sourced P2P software in 2009. Now, even though the currency must still be mined digitally and has no physical backing to guarantee it’s worth from day to day, Bitcoin is classified as a commodity by the Commodity Futures Trading Commission (CFTC) in 2015.
Using Bitcoin–and the other cryptocurrencies like Altcoin, Dogecoin, Etherium, etc–is almost as simple as using cash or credit. The biggest inconveniences are finding ways to mine the coin and finding places to store/invest it for future use. Most mainstream banks are still hesitant about the currency and have yet to allow customers to store bitcoin in traditional checking or savings accounts.
And, far as mining and storing cryptocurrencies is concerned, this is a booming market. Companies like Genesis Mining are taking advantage of the mainstreaming of cryptocurrencies by offering mining and “wallets” for their customers. Bitcoin fans are no longer required to dedicate their own bandwidth and server processes to running mining algorithms. They simply sign up with a company like they would with any other type of investing or financial firm and the experts take care of the rest.
So what does this mean for you? Since more and more businesses are accepting Bitcoin and it’s sister cryptocurrencies, if you opt into the trend does that mean that the Bitcoin you accept must be treated as income? Or is it more like free money because the market is still figuring out how to regulate it?
Honestly? This is still complicated. For individual traders, the IRS considers Bitcoin and other convertible cyber and cryptocurrencies property. This means that, according to William Perez over at The Balance, if you use Bitcoin as money–trading it for goods and services, the transaction is a twofer–it is counted as both the disposal of property as well as the spending of the “dollar-equivalent amount.” Perez also notes that accepting Bitcoin as income–whether through your business or as wages subjects it to the same withholding and tax rates as regular income.
Whatever you do–whether you’re preparing your own taxes or are working with a professional tax preparer–do not simply lump in your Bitcoin-based earnings with your regular earnings. Because cryptocurrencies exist in a regulatory gray area between income and property, you will need to track them separately and treat them differently than you do other earnings, assets, and investments. How you include them in your taxes is going to depend upon how you dealt with them.
This is why it is incredibly important to keep very detailed records of every single thing you do with your Bitcoin (or whatever cryptocurrency you choose).
“…every US taxpayer is required to keep a record of all buying, selling of, investing in, or using bitcoins to pay for goods or services (which the IRS considers bartering)…When it comes to bitcoins the following are different transactions that will lead to taxes:
- Selling bitcoins, mined personally, to a third party.
- Selling bitcoins, bought from someone, to a third party.
- Using bitcoins, which one may have mined, to buy goods or services.
- Using bitcoins, bought from someone, to buy goods or services.”
Record all of these transactions the same way you would any sales or income but do so separately. Many of the accounting software programs now have built in functionality to help you track Bitcoins in their own special categories so that, at tax time, you will be ready to go. If you aren’t using software, you’ll want to keep track of cryptocurrencies on separate spreadsheets and databases.
All of this extra work might make Bitcoin seem like a hassle but try not to get discouraged. As time goes on and more and more of our money is dealt with digitally (do you still carry cash regularly?), cryptocurrencies will gain legitimacy. It is reasonable to assume that someday all currencies will be virtual. So! Get in now while the getting is good and the taxes haven’t gotten out of hand!