How is digital currency taxed?
1) As property: short-term and long-term capital gains apply. This takes effect when appreciation is realized. Short term capital gains take effect when gains are realized in the past year, and are taxed at your normal income tax rate. Long term capital gains take effect when gains are realized over a period longer than one year, and are taxed at a rate lesser than income tax but still dependent on tax bracket.
2) Income tax: income tax applies when coins are earned as a result of mining or compensation. Miners, and those paid in digital currency must include the fair market value of their earnings as part of their annual income.
3) Other cases: digital currency can also take the form of gifts and donations. When giving a gift or donation, gains are not realized. The market value of donations can be written off against income. Gifts cannot be written off. The receiver of a gift adopts the cost basis from the previous owner.
What is considered a “Taxable Event”
- When you sell it (a gain or loss is realized)
- When you purchase goods or services with it, including alt-coins (a gain or loss is realized)
- When you mine it (considered earned income)
- When you buy it (a basis is established, but no gains/losses are realized yet)
- When you gift it (unless you give more than $14,000 to an individual in a year)
- When you donate it (but the value can be written off)
How is the exchange price determined?
- Specific price provided by the exchange when it is “traded” (bought or sold)
- “Fair Market Value” – from a weighted index of historical exchange prices
- Specific input from user – if exact exchange price is known, the value may be overwritten
How is the tax rate determined?
Short-term rates (same as ordinary income tax rate): 10% – 39.6% in 2013
Long-term rates: 0%, 15%, or 20% for most taxpayers
Can I file losses?
Individuals can file up to $3000 in net losses per year, any additional losses can carry over to subsequent years. A filed loss will directly offset earned income.
How can I get my transaction history?
Via API: We can upload your transaction history by logging into an external exchange or wallet. (Coinbase is supported now, more are coming)
Via Spreadsheet: Many wallets and exchanges allow you to extract your transaction history. These can be uploaded directly. (Coinbase, Blockchain, and Bitstamp are supported now, more are coming). A generic format for uploading transactions from any source is also available, but you will need to arrange the columns and data according to the template.
Via Address: By adding bitcoin addresses to your account, we can retrieve your transaction history from the blockchain.
Where can I learn more about tax treatment of digital currency?
The most comprehensive and current resource on the subject of taxation for digital currencies is on Investopedia, written by Ryan Selkis.
- Trading Gains and Losses – Fair Market Value
- Trading Gains and Losses – Alt-Currencies
- Trading Gains and Losses – LIFO, FIFO, Offsetting Lots
- Trading Gains and Losses – Wash Sales: Impossible to track?
- Bitcoin Commerce: Taxable Events – E-commerce Taxation
- Bitcoin Commerce: Taxable Events – Donations
- Bitcoin Commerce: Taxable Events – Gifts And Tips
- Bitcoin Commerce: Lost Or Stolen Bitcoins
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