Bitcoin And Tax Season: What You Should Know

Though bitcoin has had a volatile year, the cryptocurrency’s popularity is still growing quickly as more and more users create digital wallets to buy and sell the currency. However with tax season on the horizon, questions regarding the Internal Revenue Services’ treatment of bitcoin are beginning to arise.

A Complicated Affair

Instead of recognizing bitcoin as a foreign currency, tax rules separate bitcoins which have been mined from those that have been bought as different assets. For investors who bought their bitcoins, the cryptocurrency is considered property and taxed as such. Mined bitcoins are taxed based on the gains or losses the miner realizes when the currency is sold. So miners holding on to their bitcoins wouldn’t have to pay any taxes until they sold their currency.

Paper Trail

The IRS regulations are increasingly more complicated because they require bitcoin holders to have a record of their transactions. Since bitcoins are treated as property under current tax law, owners will need details as to where and when the currency was purchased in order to state its value. Additionally, if a person then uses those bitcoins to make a purchase, they will need to track the value at the time of sale.

The Beginning Of A New Era

While this year’s tax laws may seem confusing, many expect to see things get even trickier in the years to come. Since bitcoin has only just emerged as a viable currency, it will take time for the government to catch up with tax rules. If the currency becomes widely popular in the coming years, the IRS will probably streamline its tax rules to make it easier for bitcoin users to declare their earnings, but that day is likely a long way off.