As I explain in my four part series on bitcoin (read parts one, two, three, and four), I’m a skeptic of crypto-currency trading and I don’t own any crypto-currencies. I believe, much like Warren Buffett told CNBC on Wednesday, that the crypto-craze won’t end well.
The IRS has given some guidance on how to account for sales of crypto-currencies, but keeping track of all sales may be hard.
Brian Fung explains in The Washington Post:
The most recent IRS guidance on the matter is from 2014, when it said taxpayers should treat their virtual currency like property. Under that rule, taxpayers must declare any profit, also known as capital gains, or losses they take when they sell bitcoin at a different price than when they bought it. The same policy applies to purchases of real-world goods. For example, suppose you tried to buy a cup of coffee with bitcoin. That would technically count as a sale of your bitcoin. You might owe capital gains tax if the bitcoin you paid at the cash register had increased in value from the time you first acquired it. The IRS declined to comment for this story, referring back to that 2014 guidance.
While the IRS ruling cleared up some questions, it raised others, such as who would be responsible for tracking each investor’s purchase and sale prices, and what methodology would be used to calculate gains. Another question is how to treat the creation of new virtual currencies that emerge as offshoots or “forks” of old ones.
“How does one account for taxes when you have a fork — is it [like] a stock split?” asked Jerry Brito, executive director of the Coin Center, a think tank for virtual currency issues.
With stock, brokerage firms such as Vanguard and Charles Schwab typically help investors track their gains and losses with a year-end tax document, Form 1099. But companies such as Gemini that handle virtual currencies, which haven’t been around for very long, face more ambiguous reporting obligations, leaving it mostly up to individual investors to crunch the numbers themselves. That demands a facility for numbers and an exacting level of attention. Things get even thornier for U.S. employees who work for bitcoin-related companies and may receive the digital currency as part of their salary; that money is taxed as regular income, not investment income.
Read more here.