When the IRS issued guidance that Bitcoin would be classified from a tax perspective as “property” rather than a “currency” this meant that all US taxpayers must keep track of the price they purchase Bitcoin at, as well as the price they redeem it at. Depending on the number of Bitcoin transactions you made in 2014, this could be a complete headache that could take hours or even days to get rid of – here’s why:
Bought and and sold any quantity of Bitcoin in 2014? Iceberg dead ahead.Let’s say that halfway through 2014 you had made a few different purchases totaling up to approximately one bitcoin, or any amount for that matter. For some reason or another, maybe because the price was dropping, you decided to sell a fraction of that one bitcoin that you owned. This means you now have to report this transaction to the IRS. What’s the correct purchase price you need to use to match up to this sell for compliant reporting on your return? We’ll get to that, but first another potentially problematic situation.
Tip someone? Tip several people? You’ve given the IRS gift that keeps on giving. Anyone that you tipped in 2014 is supposed to keep track of the price *you* acquired Bitcoin at so they can correctly declare a profit or loss on *their* return when they redeem it. Uh, what? Thanks for the tip? Let’s move on to another complication.
Pay anyone for anything in 2014 with Bitcoin? Get out the calculator. Since you most likely didn’t buy exactly a cup of coffee’s worth of Bitcoin, or the exact amount of whatever you paid for, how do you figure out the correct profit or loss to declare? Which original purchase of Bitcoin are you supposed to associate this payment with? Up next is where things really get ugly.
Someone paid you Bitcoin for work you did in 2014? Hypothermic Leonardo DiCaprio in *Titantic* time. There is no gain or loss you have to calculate – but you have to recognize the bitcoin at whatever price it was worth at the time it was paid to you. You are liable to pay tax on the total amount that was paid to you based on your income bracket. This could be very problematic, because let’s say you were paid $750 worth of bitcoin at the beginning of 2014 and when you sold it later in the year, it was only worth $400 – you still have to pay tax for when it was worth $750. And oh yeah – let’s say that for a period of time the $750 worth of bitcoin you were paid became worth $900 and you cashed out on your good fortune. Well, you have to pay tax on your income of $750 worth of bitcoin and $150 on the capital gain you saw from profiting off of it, too. Maybe things will get better from here on out, let’s move on.
Done figuring out the above? Great – now here’s an IRS Form 8949 that you can figure out how to fill out and attach to your tax return. Don’t get it wrong or you could mess up all of your work that’s taken hours or days. Or maybe you can pay extra to your CPA to have him or her help with you with it, assuming they understand what Bitcoin is and all of the various scenarios that have been outlined in this article. The light at the end of the tunnel wastrain.
I know it’s a bummer to have to read about this kind of stuff. We’re all busy and no one is in a hurry to add a bunch of headache and extra work to their day. If you made it this far, though, I’m happy to let you know that I have some tylenol – we’ve built an app called LibraTax that automatically imports your bitcoin transactions and automatically calculates allllllllll of this stuff in minutes. We have several different reporting options to compliantly minimize any gains you may have, and maximize any losses – you can write off up to $3000.
Ah, and I almost forgot – we’ll automatically fill out that IRS Form 8949 for you,, too. And if you’re a person that wants to remain anonymous, you can see what your tax situation looks like even without giving us any of your personal info. 🙂