Q: Carl in Loveland: I bought some bitcoin last year just for fun and ended up making some money. Do I owe taxes?
A:The answer depends on what you’ve done – or not done – with your Bitcoin. For instance, if you haven’t touched it and your gains are merely ‘on paper,’ you won’t owe taxes. But if you used your Bitcoin to buy something or if you sold to harvest gains, then, yes, Uncle Sam wants his cut.
This may surprise some people. After all, Bitcoins are just one of many different kinds of ‘cryptocurrency’ that are not backed by any singular central bank, so how can the U.S. government tax a currency that’s decentralized? Easy. In the eyes of the IRS, cryptocurrency isn’t a currency at all – it’s ‘property’ and thereby subject to taxes (either short-term capital gains tax or long-term capital gains tax depending on how long you’ve had it). Even if you use Bitcoins to buy, say, a coffee, you are technically required to calculate your gains (or losses).
However, not all cryptocurrency users and investors are being honest, so the IRS is trying to step up its enforcement to stop these people from cheating the system. In fact, according to CNBC, you’ll see a new question specifically about cryptocurrency at the very top of the new Form 1040 this tax season. This prominent location means the IRS is serious about these transactions.
The Simply Money point is to keep track of everything related to your Bitcoin. This includes every single transaction, be it via buying, selling, exchanging, mining, receiving, or sending. And, just like with a stock, be sure to document your cost basis.