This tutorial takes an in-depth look at the coming tax consequences of IRS Notice 2014-21 for the U.S.While much has been written about the IRS tax guidance (first introduced March 2014) on virtual currencies, few have done comprehensive analyses of the plethora of record-keeping and enforcement challenges that will arise as a result of the agency's decision to treat Bitcoin as property rather than currency.Diverse stakeholders ranging from consumers, merchants, miners and Bitcoin service providers (all of whom may also be considered "investors" at various times) must now grapple with complex and unclear tax reporting requirements in the coming months - even though more clarifications and changes from the agency seem inevitable following the "public comment" period this spring.We'll kick things off by outlining what Joe Consumer should discuss with his tax adviser in advance of filing his personal tax returns on April 15.For the sake of our article (and round numbers), we will assume that Joe is married and that he and his wife made a combined $100,000 of taxable income in 2016.

With that in mind, how should Joe report trading gains and losses for Bitcoin and any of his other alt-coin investments?How about purchases he made with Bitcoin?What about the funds he lost in his trading account at the now-defunct Mt.Gox exchange - can those be written off?And how about that gift he gave to Dorian Nakamoto's fundraiser or the tips he received for his blog posts?We'll attempt to tackle the basics for Joe Consumer, but the best synopsis may be this: Talk to a tax expert as soon as possible, even if you are one yourself.wifi bitcoin miningThe most widely reported aspect of the IRS ruling on Bitcoin has to do with its treatment as property.bitcoin ammoThis is a favorable ruling for most investors given Bitcoin's stellar performance to date, as accrued long-term gains and losses will be taxed at the taxpayer's applicable capital gains rate (15% in Joe's case) rather than ordinary income rates (25% for Joe).bitcoin ppt

For many early Bitcoin "miners" and investors, this constitutes a massive difference in marginal rates.That said, active traders who have racked up short-term capital gains may still be taxed at ordinary income rates.Investors with trading losses, on the other hand, might not be so happy with the ruling.It will be much more difficult to write off bad Bitcoin bets now that they are considered property rather than currency.The IRS limits the amount of property losses (net capital losses, to be specific) that can be claimed on personal tax returns to $3,000 per year for both married and single filers, a limit that hasn't been raised since 1978.trade bitcoin to dogecoinFor these unfortunate folks, large short-term trading losses will need to be carried forward, in some cases for many years.kurs bitcoin 2014Trading losers would have been much better off if they could have written off "foreign currency" losses against their ordinary income.bitcoin börsen deutschland

And this is the most basic application of the IRS guidance.Buckle up folks, because the rest of this article may blow your minds, not to mention demonstrate the dire need for the IRS to conform certain areas of the tax code to the new world's peer-to-peer structure.The full nuance of Bitcoin's property tax treatment is complex, but let's try to break it down piece by piece.Whenever bitcoin is bought, sold, or traded, there are tax impacts.We'll discuss how bitcoins and other forms of virtual currency are taxed, and point out record keeping requirements and tax planning techniques that can be utilized.At the end you'll find resources for continuing your own research."Thekey thing going forward is maintaining records, substantially similar to stock," says Jason Tyra, a certified public accountant in Texas who specializes in bitcoin; "Incomplete records might as well be no records."Why is record keeping such an important topic?Maintaining records is essential for accurately measuring bitcoin-related income.When it comes to taxes, the Internal Revenue Service has ruled that bitcoins and other "convertible virtual currencies" are "treated as property" and not treated as currency.

This concise guidance from the IRS has implications for how bitcoins are taxed, what information is needed to make sure taxes are calculated correctly, and what tax planning techniques people can use to minimize their taxes on Bitcoin transactions.In brief, Source: Notice 2014-21 (pdf version | Web version), IRS.gov."Everybitcoin transaction is taxable," writes Tyson Cross, a tax attorney who specializes in virtual currencies."Bitcoin users will have to calculate their gain or loss every time they purchase goods or services with bitcoin."Let'sthink for a moment about what this means.The IRS said that bitcoin and similar convertible virtual currencies are property for tax purposes.As with other types of property, first one acquires property, often by exchanging cash for the property.Then one owns the property for a period of time.And then eventually one might sell or give away or trade or otherwise dispose of the property.So with any type of property we have three moments in time: acquiring the property, holding the property, and disposing of the property.

The same three aspects are found with convertible virtual currencies.Let's start by discussing what happens from a tax perspective at the end when bitcoins are sold or disposed of.Since bitcoins are property, we would follow the rules that apply to dispositions of property.When property is disposed of, four things happen:Income is realized from any gains on the property.Gain is measured by the change in the dollar value between the cost basis (the purchase price) and the gross proceeds received from the disposition (the selling price).The tax rates that apply depend on whether the property was held for a short-term or for a long-term duration.And finally,Dispositions of property are reported on the tax return using Schedule D & Form 8949 or Form 4797.These forms require us to "show our math" when calculating gain or loss.Tax Tips for Merchants & BusinessesIdentify an exchange rate to use consistently in valuing bitcoins received.Charge sales tax when a customer buys from you using bitcoin, if that's required in your line of business.When paying an independent contractor $600 or more during the year, request Form W-9 and issue Form 1099-MISC, even if you pay them in bitcoin.

Track the amount paid to contractors throughout the year to measure whether you reach the $600 threshold.Backup withholding may be required.If paying employees in bitcoin, first withhold all applicable payroll taxes in US dollars.Net pay can then be paid out in bitcoin as appropriate.Taxes are paid in dollars, not in bitcoin.pare bitcoin fees/commissions and processing times with other payment technologies (such as merchant accounts, PayPal, etc.).Tax Tips for Casual Bitcoin UsersEstablish a record-keeping system.Keep track of when you acquire and when you dispose of bitcoins.Record dispositions of bitcoins on Schedule D and Form 8949.Each purchase using bitcoin is two transactions in one: an implied disposition and an expense.On a non-tax note, casual bitcoin users will want to use a reputable bitcoin wallet provider.Reputable wallet providers have implemented risk mitigation tools to make buying, trading and selling bitcoins more secure and user-friendly, notes David Berger.Tax Tips for Bitcoin Investors and SpeculatorsEstablish a record-keeping system.Record dispositions of bitcoin on Schedule D and Form 8949.Identify your cost basis method.Identify your exchange rate.Keep separate wallets for short-term trading, long-term buy-and-hold positions, and personal spending.Normal capital gains strategies apply: offset gains with losses, time dispositions to qualify for long-term treatment, harvesting losses, and harvesting gains.Watch the tax rates: gains subject to the 3.8% net investment income tax.Identity the tax treatment for bitcoins received by "mining" them – may be business income subject to the income tax and self-employment tax.Deduct any investment-related expenses (Schedule A).Deduct any investment interest (Schedule A).Deduct tax preparation and advisory fees related to determining the tax treatment of bitcoins (Schedule A).Elect Market to Market trading?

This would mean all gains are short-term and reported on Form 4797, and any bitcoin-related expenses are deducted on Schedule C.Apart from tax considerations, investors should take a look at wallet providers or registered investment vehicles with security features one might expect from a banking institution.Some platforms offer to "insure holdings or store holdings offline in a vault," says David Berger.Software Tools for Tracking BitcoinsLibraTax: Web-based software for importing bitcoin transactions and calculating gains/losses.BitcoinTaxes:Web-based software for importing data and calculating gains/losses.PayByCoin add-on for Quickbooks Online customers for merchants to accept payment via bitcoin and reconcile the data inside the online version of Quickbooks.Tax and Accounting Articles about BitcoinJason Tyra, CPA, has written extensively about bitcoin at Bitcoin Magazine, BitcoinTaxBlog and CoinDesk.Annette Nellen takes an in-depth look at the IRS guidance in "Bitcoin Taxation: Clarity and Mystery," (June 12, 2014).In Bitcoins Update (10/11/14), Jack Townsend provides a summary of how the IRS is "gearing up for criminal tax investigations" involving bitcoin.Deloitte has produced an infographic describing the pros and cons of bitcoin.Jessica Bruno describes how bitcoins are taxed in Canada in her article, What to Do with Digital Currency?