How to handle bitcoin tax situations like airdrops and mining

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.

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.

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.

At the beginning of 2017 Bitcoin was trading at $968.

During the year it grew to a high of $19,783.

News stories sparked many to ask, “Should I invest in Bitcoin?” More recently Bitcoin’s price had dropped back to $6,511 and the interest subsided.

For some users, Bitcoin is a way to avoid government intrusion and illegally evade paying taxes. Most Bitcoin owners, however, want to comply with IRS regulations.

The IRS classifies all cryptocurrencies as property.

Buying Bitcoin is not a taxable event.

But using Bitcoin to buy something else is considered a sale of Bitcoin and selling property for more than you purchased it for is a taxable event. If you “sell” some Bitcoin at a profit that you purchased within the last year, you will have to report short term capital gains on your tax return and pay ordinary income tax rates.

The massive tax bust of crypto owners has begun with the IRS mailing 10,000 letters to crypto account owners. These letters educate crypto account holders about the rules and tell taxpayers to review their tax reporting for crypto transactions to be sure they reported income correctly. If necessary, taxpayers should file amended tax returns and or late returns. These tax returns should be marked with the corresponding letter type (i.e., Letter 6173, 6174 or 6174-A) and mailed to a particular IRS address. In other words, these tax filings won’t be a needle in the haystack and the IRS will take a close look. Many audits may follow.

We have information that you have or had one or more accounts containing virtual currency and may not have met your U.S.

Crypto mining is the process of releasing cryptocurrencies into a network by completing a given set of mathematical computations. And just like any other mining industry — gold, data, etc.– it comes with a unique set of challenges.

For the uninitiated, cryptocurrencies are underpinned by a technology known as blockchain.

Blockchains are digital ledgers that permanently store information.

More precisely, they are strings of blocks containing verified data joined together by “hashes.” Hence, to create a blockchain, data has to be processed and verified. This is where crypto miners come in, verifying data and earning cryptocurrency rewards in return.

Originally, you could easily mine with your personal computers.

However, this isn’t the case anymore, especially with an increase in the number of crypto miners.

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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.

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 ever-developing cryptocurrency world, everything from “bitcoin mining” to “airdrops” could add to the tax bill.

“What surprised me was the number of people that I’ve spoken with that didn’t necessarily believe that many of these trades were subject to tax,” said Michael Meisler, global blockchain leader for Ernst & Young’s tax practice. “There was a lack of understanding of some relatively basic tax principles. Calculate your relative gain and pay tax on it.”

The Internal Revenue Service views bitcoin and other cryptocurrencies as property, which means profits from any transactions are generally subject to capital gains tax.

Paying the dues on bitcoin itself may be relatively straightforward, unless an investor bought and sold at several different price points. Then that raises the question of what the capital gains were.

By Michael Nadeau

Senior Editor,

CSO |

Cryptojacking is the unauthorized use of someone else’s computer to mine cryptocurrency. Hackers do this by either getting the victim to click on a malicious link in an email that loads cryptomining code on the computer, or by infecting a website or online ad with JavaScript code that auto-executes once loaded in the victim’s browser.

[ How much does a cyber attack really cost? Take a look at the numbers. | Get the latest from CSO by signing up for our newsletters.

Cryptocurrency is a relatively new innovation that requires guidelines on taxation so that Canadians are aware of how to meet their tax obligations. The Senate reviewed the issue of taxation on cryptocurrency in 2014 and recommended action to help Canadians understand how to comply with their taxes, which the Canada Revenue Agency (CRA) is doing by presenting this guide.

Cryptocurrency is a digital representation of value that is not legal tender. It is a digital asset, sometimes also referred to as a crypto asset or altcoin that works as a medium of exchange for goods and services between the parties who agree to use it. Strong encryption techniques are used to control how units of cryptocurrency are created and to verify transactions.

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