Beginners Guide: Bitcoin & Cryptocurrency Taxes in 2020 | Koinly

Virtual currency like Bitcoin has shifted into the public eye in recent years. Some employees are paid with Bitcoin, more than a few retailers accept Bitcoin as payment, and others hold the e-currency as a capital asset. Recently, the Internal Revenue Service (IRS) clarified the tax treatment of virtual currency transactions.

Bitcoin is the most widely circulated digital currency or e-currency as of 2019. It’s called a convertible virtual currency because it has an equivalent value in real currency. The sale or exchange of a convertible virtual currency—including its use to pay for goods or services—has tax implications. The IRS answered some common questions about the tax treatment of virtual currency transactions in its recent IRS Revenue Ruling 2019-24 and it Frequently Asked Questions article. Tax treatment depends on how a virtual currency is held and used.

Cryptocurrency tax policies are confusing people around the world.

This guide breaks down specific crypto tax implications within the U.S., but similar issues arise in many other countries.

Cryptocurrencies like Bitcoin have gained significant popularity over the past few years and into 2019. This rise in popularity is causing governments to pay closer attention to the asset. Recently, we’ve seen the IRS release new cryptocurrency tax guidance and start sending thousands of warning letters to non-compliant cryptocurrency investors. The question everyone is asking: How is cryptocurrency handled for tax purposes?

According to official IRS guidance, Bitcoin and other cryptocurrencies should be treated as property for tax purposes — not as currency.

Bitcoin is “the grandfather” of cryptocurrency, as well as the first official application of blockchain technology.

Given this, it is an inherently disruptive technology.

Just as blockchain technology has disrupted traditional ledger technologies, Bitcoin has made waves in the fintech and currency spaces by successfully sustaining a decentralized, yet secure digital currency solution.

Bitcoin does not need centralized institutions—like banks—to be its backbone. Instead, a cryptographic encryption system acts as the mathematical authority required to organize and verify transactions. Bitcoin miners task their PCs with solving pieces of an open-source algorithm, which helps to organize and verify transactions.

This guide covers crypto taxes for US citizens that will be filing in April 2020. We will go over everything from crypto-to-crypto trades to ICOs and hard Forks. We will also look at how crypto capital gains are actually calculated and how you can minimize them. Finally, we will go over the tax forms that you need to file and the deadlines.

UPDATE 9th Oct 2019: The guide has been updated in accordance with the latest guidelines released by the IRS on the 9th of October 2019.

UPDATE 20th Dec 2019: Today, 8 congressmen signed and sent a letter to the IRS asking for clarification on things like Hard Forks and Margin Trades. We will update this guide if/when the IRS reponds to it.

Cryptocurrencies such as Bitcoin and Ethereum, are treated as property under federal tax law in the United States 1.

Virtual currency like Bitcoin has shifted into the public eye in recent years. Some employees are paid with Bitcoin, more than a few retailers accept Bitcoin as payment, and others hold the e-currency as a capital asset. Recently, the Internal Revenue Service (IRS) clarified the tax treatment of virtual currency transactions.

Bitcoin is the most widely circulated digital currency or e-currency as of 2019. It’s called a convertible virtual currency because it has an equivalent value in real currency. The sale or exchange of a convertible virtual currency—including its use to pay for goods or services—has tax implications. The IRS answered some common questions about the tax treatment of virtual currency transactions in its recent IRS Revenue Ruling 2019-24 and it Frequently Asked Questions article. Tax treatment depends on how a virtual currency is held and used.

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For those who asked about my crypto taxes – ended up going w @cointracker. Best UX I found after looking at a number of options.

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The U.S. Internal Revenue Service (IRS) has published its first guidance in five years for calculating taxes owed on cryptocurrency holdings.

Industry members have been eagerly awaiting the update since May 2019, when IRS Commissioner Charles Rettig said the agency was working on providing fresh guidance.

One reply on “Beginners Guide: Bitcoin & Cryptocurrency Taxes in 2020 | Koinly”

Beginners Guide: Bitcoin & Cryptocurrency Taxes in 2020 | Koinly

Fred traded bitcoin, ether and a handful of other cryptocurrencies on Gemini, Binance and Coinbase last year. Unfortunately, due to the crypto downturn, his trading yielded a capital loss of more than $35,000. He’s not alone — the stories have been coming out right and left about people who are not already rich, who have lost serious money lately.

While it was a rough loss, filing taxes could add another headache in a few weeks if not done correctly.

Given that bitcoin is down 55 percent year-over-year in 2018, compared to 686 percent up the year before, chances are that filing taxes on crypto trades may look quite different this year for crypto holders like Fred.

The main difference is that users will want to claim capital losses in a bear year to reduce their tax bill.

Cryptocurrency received from mining is treated in two ways for tax purposes. Other factors also come into play depending on whether or not your mining operation is treated as a business entity or just as a hobby. This article breaks down each of these two taxable events and explains the implications of reporting your crypto and bitcoin mining transactions on your taxes.

The first tax event you need to be aware of is income received from mining. When you mine coins, you have income on the day the coin is “created” in your account at that day’s exchange value.

For example, if you successfully mined 0.25 ETH on June 15th, 2018, then you have income of whatever the USD value of 0.25 ETH was on June 15th, 2018.

Bitcoin is a virtual currency that uses cryptographic encryption system to facilitate secure transfers and storage. Unlike a fiat currency, bitcoin is not printed by a central back, nor is it backed by any. Bitcoins are generated by what is called mining—a process wherein high-powered computers, on a distributed network, use an open source mathematical formula to produce bitcoins. It takes real high-tech hardware and hours or even days to mine bitcoins. One can either mine bitcoins or buy them from someone by paying cash, using a credit card, or even a PayPal account. Bitcoins can be used like a fiat world currency to buy goods and services.

Bitcoin is now listed on exchanges and has been paired with leading world currencies such as the US dollar and the euro.

When you mine the coins, you have income on the day the coin is “created” in your account at that day’s exchange value.

 You can report the income as a hobby or as self-employment.

 If you report as a hobby, you include the value of the coins as “other income” on line 21 of form 1040.  Your ability to deduct any expenses is limited — expenses are itemized deductions subject to the 2% rule.

If you report as self-employment income (you are doing “work” with the intent of earning a profit) then you report the income on schedule C.  You can fully deduct your expenses (if you can prove them) (see later).  The net profit is subject to income tax and self-employment tax.

Your second income stream comes when you actually sell the coins to someone else for dollars or other currency.

Fred traded bitcoin, ether and a handful of other cryptocurrencies on Gemini, Binance and Coinbase last year. Unfortunately, due to the crypto downturn, his trading yielded a capital loss of more than $35,000. He’s not alone — the stories have been coming out right and left about people who are not already rich, who have lost serious money lately.

While it was a rough loss, filing taxes could add another headache in a few weeks if not done correctly.

Given that bitcoin is down 55 percent year-over-year in 2018, compared to 686 percent up the year before, chances are that filing taxes on crypto trades may look quite different this year for crypto holders like Fred.

The main difference is that users will want to claim capital losses in a bear year to reduce their tax bill.

In the US, the IRS originally released cryptocurrency guidance in 2014 and followed it up on October 2019 with additional cryptocurrency tax guidance.

The way cryptocurrency mining income is taxed depends on whether you are a hobbyist miner or a self-employed (business) miner. Here are some of the measures that the IRS provides for determining which camp you are in:

As you can see, there is some amount of subjectivity to the classification. For example, if you operate a mining farm full-time you are more likely to be categorized as a business. If you are randomly doing some mining on an old computer, you are probably a hobbyist.

What’s Next | Taxes

When it comes to cryptocurrency and taxes, ambiguity reigns. Bitcoin and Ethereum are still in the early stages of development, and their values are extremely volatile.

As of early December 2017, one bitcoin was fluctuating between $15,000- $18,000, and its value has changed dramatically over the past year alone.

Cryptocurrencies are designed to be a more efficient and reliable form of decentralized currency that anyone can buy and sell through online exchanges.

They can be digitally traded for or exchanged into U.S.

dollars, euros or any other form of currency (real or virtual).

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By signing up, you will receive emails about CoinDesk products and you agree to our terms & conditions and privacy policy

By signing up, you will receive emails about CoinDesk products and you agree to our terms & conditions and privacy policy

Mario “The Problem Solver” Costanz is a lifelong entrepreneur and the author of “Crypto Taxes Made Happy: The Definitive How-To Guide For Preparing Cryptocurrency Tax Returns In The United States,” available for free on Amazon. He was named to the “One to Watch” section of Accounting Today’s 2017 Top 100 Most Influential in Accounting List.

This guide covers crypto taxes for US citizens that will be filing in April 2020. We will go over everything from crypto-to-crypto trades to ICOs and hard Forks. We will also look at how crypto capital gains are actually calculated and how you can minimize them. Finally, we will go over the tax forms that you need to file and the deadlines.

UPDATE 9th Oct 2019: The guide has been updated in accordance with the latest guidelines released by the IRS on the 9th of October 2019.

UPDATE 20th Dec 2019: Today, 8 congressmen signed and sent a letter to the IRS asking for clarification on things like Hard Forks and Margin Trades. We will update this guide if/when the IRS reponds to it.

Cryptocurrencies such as Bitcoin and Ethereum, are treated as property under federal tax law in the United States 1.

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Cryptocurrency networks rely on the participation of miners, who contribute to the maintenance of the blockchain networks and are rewarded in the form of cryptocurrency. Crypto mining can be extremely profitable — but how does cryptocurrency mining tax work?

Cryptocurrency mining can be considered either a hobby or a commercial practice.

One reply on “Beginners Guide: Bitcoin & Cryptocurrency Taxes in 2020 | Koinly”