Note: This report was compiled on November 30, 2017, but will be updated annually. Please be aware that the information in this report was collected before November 30, 2017.
For many people, taxes are the worst part of the year...
We don't blame them. As it stands, tax law is confusing.
And it gets even more confusing when you add a new and rising investment star like digital currency into the mix.
Since the start of 2017, the value of multiple digital currencies has skyrocketed.
Bitcoin, which started 2017 near $1,000, broke the $10,000 barrier in November. And many analysts believe that this is just the start...
This is great news for people who still want to participate in the digital currency boom.
However, the rise of Bitcoin and other digital currencies also means that many investors are sitting on a landslide of profits and have no idea how to report it.
That's why we've put together this guide...
In essence, this guide provides investors with some information to help them in navigating the digital currency tax world. This guide is not intended to act as tax advice.
Over the course of this guide, we look at the following:
- The IRS disclosure on digital currency taxes.
- Resources available from Coinbase.
- A supplemental link to our digital currency education service.
So, let’s get started...
Do You Have to Report Gains to the IRS?
The answer is yes — you have to report the gains you've made on your digital assets.
In a memo dated March 25, 2014, the IRS issued a statement on virtual currencies like Bitcoin. In the memo, the IRS goes to great lengths to address many of the questions about digital assets...
First, the IRS stated that Bitcoin is treated as “property” for U.S. tax purposes. This designation comes from the fact that, while Bitcoin and other digital currencies are used as currencies in some locations, they're not currently accepted as legal currencies in the U.S.
This means that the tax laws applied to property transactions are what apply to digital currency transactions.
In the statement, the IRS goes on to say:
- Wages paid to employees using virtual currency are taxable to the employee, and this information must be correctly reported by the employer through a W-2. Digital currency income is still subject to federal income tax.
- If you use digital currency to make payments to your employees or contractors, then self-employment tax rules apply.
- If you make a payment in virtual currency, it's subject to the same information reporting as “any other payment made in property.”
The above are just a few guidelines provided by the IRS. If you want to read the full statement, you may access it here.
Before moving on to the Coinbase section, there are a few other things worth mentioning...
If you're a digital currency miner, you're still subject to report. You may read more details about that in the FAQ section of the full statement linked above.
Second, if you don't report, you may be subject to penalties, including “accuracy-related penalties under section 6662.”
That being said, the IRS recognizes that many people will have questions. If you go into that FAQ in its statement, you'll find details on contacting the IRS about digital currency questions.
You might walk away from that IRS statement with your head spinning, but there's no reason to panic.
What you've learned is that Bitcoin is considered “property” by the IRS and will be taxed as such.
Now, when it comes to actual reporting, there are many resources available to investors.
Coinbase provides two such tools. Which one you use depends on how much you've made from trading digital assets...
Coinbase and the IRS
But before we plunge into the tools that Coinbase offers its investors, it's worth noting the long battle between the IRS and the world's leading digital currency exchange.
Coinbase had been embroiled in a spat with the IRS for over a year. The IRS had been requesting customer information, and Coinbase had been trying to protect user privacy.
But that battle came to an end on November 29th with a California federal court ordering Coinbase to turn over identifying records for all users who have bought, sold, sent, or received more than $20,000 with their accounts in a single year between 2013 and 2015.
With the ruling, Coinbase will have to hand over the names, birth dates, addresses, and taxpayer IDs of each of its users to fit those parameters. This information, though a defeat to Coinbase, is actually far less than what the IRS originally requested.
The reason for the tax case being filed was because the IRS noticed a discrepancy between the Bitcoin gains that took place and the amount reported for that time frame.
This discrepancy indicates that, while it's possible many people hid their gains, there were probably also a lot of people who were confused by the reporting process.
And that's why we wanted to spotlight some of the tools that Coinbase has for helping its users report.
Coinbase Tax Reporting Tools
The vast majority of American cryptocurrency investors use Coinbase, which is easily the most popular software wallet out there. Within just one month this year, Coinbase added over a million years.
As mentioned above, Coinbase is now required to hand over certain information to the IRS.
If you've traded over $20,000 in digital currency for the year, Coinbase will be providing you with a 1099-K form.
Coinbase will be getting customers these 1099-Ks before January 31st for the prior calendar year.
That being said, Coinbase doesn't provide a 1099-K to everyone...
If you don't fit the exchange's requirements for a 1099-K, you may generate your own cost basis for taxes report within the Coinbase platform.
This report will provide you with the history of your purchases and sales.
It will also show your capital loss and gain on your digital currency investments.
Coinbase uses a FIFO method for generating these reports. All transactions in and out of your Coinbase wallet are treated as buys and sells. Coinbase is also advising investors to keep their own detailed reports.
This way, if there are any discrepancies, you'll be able to make the necessary adjustments or contact Coinbase with any questions.
If you'd like to read Coinbase’s blog about reporting tools, you may access that information here.
And if you’re ready to learn about generating your own cost basis for taxes report, you may go here.
Once you log in to this section of Coinbase, you'll be able to select the parameters for generating a report. Those parameters include the wallet you'd like to generate a report for and a time frame:
And there you have it! Those are the basics of the digital currency tax tools available on Coinbase.
As the digital currency world becomes more regulated, it'll likely become easier for investors to find the proper tools needed for reporting their digital currency taxes.
Other exchanges are stepping up to the bat, providing investors with the necessary information for digital currency tax reporting.
We'll be publishing an exclusive tax issue for digital currency investors through our digital currency education service.
In our issue, we'll be breaking down the tax-reporting tools and policies of multiple exchanges, including Bittrex, Gemini, and Poloniex.
That issue will be available in January 2018.
If you'd like to learn more about our digital currency education service, click here.
We wish you the best of luck with your investments and a happy holiday season!