Bitcoin’s IRS Tax Implications: Optimal Crypto Asset Accounting & Reporting Models

The IRS recently warned that virtual currency transactions are taxable by law and that people who fail to report their cryptocurrency income, file cryptocurrency late, or file crypto taxes improperly may incur penalties and interest.

For some time, investors had the opportunity to skirt by without owing any money to Uncle Sam thanks to a little-known tax loophole called the like-kind exchange. Typically reserved for real estate transactions, the like-kind exchange (Section 1031, for those interested) allowed cryptocurrency investors to exchange one virtual token for another without paying taxes. However, this crypto tax loophole was closed with the passage of the Tax Cuts and Jobs Act in late December. Now, the like-kind exchange is strictly limited to real estate.

Given Below Are Three Ways IRS Is Taxing Cryptocurrencies

Capital Gains Tax From Investing

If you buy virtual tokens and they increase in value, you'll pay either a short- or long-term capital gains tax when you sell. Keep in mind, this means paying tax on capital gains anytime you sell a virtual currency for a profit. The like-kind exchange no longer applies, as of Jan. 1, 2018. As with any investment, the short-term is defined as holding onto an asset for 365 or fewer days, while lower long-term capital gains tax rates apply to assets held for 366 or more days. Short-term capital gains are taxed at the newly revised federal ordinary income-tax rate, which varies from a low of 10% to a peak of 37%. Meanwhile, long-term capital gains are taxed at either 0%, 15%, or 20%. Single and joint-filing taxpayers can earn up to $38,600 and $77,200, respectively, in 2018 and owe nothing in long-term capital gains taxes.

Capital Gains Tax Derived From Purchasing Goods And Services

The IRS taxes virtual currencies when being used to purchase goods and services. If you've paid for anything with popular virtual coins, the IRS defines your action as having disposed of an asset. If the value of what you sold has increased from when you purchased the token(s) in question, you're responsible for paying capital gains tax on the difference. The most complicated aspect of this type of transaction is that it almost entirely places the responsibility of accurate record keeping on the taxpayer.

Crypto Mining Income

The IRS also aims to tax cryptocurrency miners based in the United States. According to the IRS, this block reward is income that you as the taxpayer need to report on your federal tax return. One option is to claim mining earnings as self-employment income. The other being that it could be filed as “other income,” or essentially a hobby or secondary income stream. The decision of which method is best for miners will likely depend on their mining costs, and the ability to separate out their electric meter expenses for running mining hardware and operating any cooling systems. Aside from reporting their block reward as income, they may also have to report a capital gain when they dispose of their received virtual tokens.

Cryptocurrency Tax Resources

If you are looking to do your crypto taxes, chances are that you might need external help. Given below are 3 resources.


A free tool for calculating cryptocurrency taxes that, more or less, works as long as you use it for simple hoarding, rather than trading, and as long as you stash your cryptocurrency with Coinbase.


It has a free version for transactions done by any cryptocurrency, as long as the transactions are simple and deal with small amounts, For unlimited and more complex transactions, BitcoinTax offers a 19.95 version per tax year. This option is your closest to a qualified accountant and may be valuable if you trade in cryptocurrency.

Bitcoin Tax Attorneys, CPAs, And Accountants

For complex trading and accounts, you’ll likely want a qualified tax attorney, CPA or tax accountant who knows Bitcoin and digital currencies.

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