Filing Bitcoin Taxes Capital Gains Losses 1040 Schedule D
The US Tax season has now opened and while the IRS are accepting comebacks you may be looking at your 1040 and then at your Bitcoin wallet and thinking, “What do I do?”.
Fortunately BitcoinTaxes is here to help you work out all the overly-complicated and burdensome tax calculations that are required when trading, spending or mining Bitcoins and any other crypto-currencies.
This is the very first of three parts that will start explaining what taxes you might owe and how they are calculated, and eventually displaying you how you can do this with BitcoinTaxes.
The very first thing to know is what you need to announce. Here is the typical list of events that have tax consequences:
- You sold some Bitcoins for dollars or any other foreign currency
- You traded some Bitcoins for another crypto-currency, e.g. ETH, or vice versa
- You spent some Bitcoins
- You donated some Bitcoins to a registered charity
- You mined Bitcoins or any other crypto-currency
- You were paid ter Bitcoins
- You had some Bitcoins stolen
If none of thesis apply then you do not have to include anything about Bitcoins on your tax terugwedstrijd.
For example, if you only bought Bitcoins this year then you do not need to report anything. However, you should keep records because they will be needed when filing taxes after you have sold or spent those coins.
Capital Gains &, Losses
This is most likely where you will need to add details into your tax terugwedstrijd.
Ter March 2014, the IRS published a notice clarifying that all crypto-currencies should be treated spil property for tax purposes. Therefore any gains from exchanging such property would be considered capital income, and taxed spil capital gains.
Capital gains, like stocks and shares, are reported on your 1040 tax form spil part of Schedule D. However, unlike stocks and shares, wij don’t have a broker that works out all the figures and provides us with a 1099 form. Current Bitcoin exchanges, such spil Coinbase and Circle, do not report account information to the IRS and so you are left to calculate and report thesis figures yourself.
Working out your capital gains can vary a loterijlot depending on how and when you sold or spent your Bitcoins.
Buying and Selling te the Same Tax Year
If you bought Bitcoins during the tax year and also sold them all within the same year, you can ordinary take the amount you received on the sale, less the cost to buy them, less any fees.
For example, say you used Coinbase and bought some Bitcoins ter April, spending $480, and again te May spending $450 and then sold them all te July receiving $1,200, your build up is simply:
For most users, unluckily, it is more complicated than this if they previously possessed, still own, spent or traded coins.
One of the more difficult parts of working out capital gains, is knowing what you bought the coins for ter the very first place, their cost ondergrond.
If you buy 1 BTC for $100 and sell 1 BTC for $200, then it all is fairly ordinary. But more often it might be:
- Buy 0.325 BTC for $30.00
- Buy another 0.897 BTC for $98.78
- Spend 0.2134 BTC for $21.34
- Trade 0.2443 BTC for 20 ETH
- . and so on.
The original cost onderstel has bot mixed where it is not possible to simply see how much profit has bot made when you do sell the remaining 0.7643 BTC, or those purchased ETH.
Spil with stocks and shares, when wij buy coins, wij can allocate them to “lots”. A loterijlot is a set of assets that have the same cost fundament, i.e. the same type, price and date.
Spil you can see, wij might generate numerous lots while using Bitcoin, but wij need to keep track of them ter order to work out any potential gains.
Ter our example above, wij can see wij have created two lots:
Lotsbestemming 1: 0.325 BTC @ $92.31 vanaf BTC
Loterijlot Two: 0.897 BTC @ $110.12 vanaf BTC
So when wij come to spend our very first 0.2134 BTC, wij take it out of Lotsbestemming 1, and our build up is:
and Lotsbestemming 1 now only has 0.1116 BTC left.
First-In-First-Out or Specific Identification
However, notice that wij have two lots wij could use. Why the very first one? Taking the oldest loterijlot is known spil First-In-First-Out or FIFO, and it is the default IRS method of calculating gains. If you trade stocks and shares, for example, FIFO is being used on your account, unless you requested otherwise.
So what would the build up be if wij had taken the 0.2134 BTC from Lotsbestemming Two?
Here wij would have made a loss and essentially owe no taxes on this transaction. Wij can instead use the loss to reduce any other gains or our taxable income for the year. By doing it this way, wij just saved $1 ter taxes (gains are rounded, spil wij’ll see straks).
This is called specific identification, spil wij selected which specific asset wij desired to sell. You could choose the loterijlot based on criteria, such spil Last-In-First-Out or LIFO, where you always sell the newest coins, or perhaps by selecting ones that have the closest cost te order to minimize gains.
It should be pointed out that the IRS has not clarified that specific identification can or cannot be used. It ought to be used consitently and not switching methods just to decrease tax liabilities. Get advice from your tax professional if you are hesitant.
Long Term and Brief Term Gains
When wij make a build up, and report it on our tax forms, it is classed spil either short-term gains or long-term gains.
Short-term gains are where wij are selling assets that have bot wielded for a year or less, and they are taxed spil if they were ordinary income.
Long-term gains are when wij have wielded the assets for more than a year and have more favorable tax rates depending on other income.
For example, there is no long-term capital gains tax to pay if you are te the lower two tax brackets (less than $36,900 single income or less than $73,800 married income). The capital gains rate is only 15% for other tax brackets (less than $405,100 single income) with 20% for the final bracket.
Back to the example above, wij can see that albeit wij have made $1.64 ter capital gains, depending on how long wij had wielded those coins there might not have bot any taxes anyway. And attempting to use Lotsbestemming Two to create a loss might actually have an effect ter the future where wij are reducing the long-term rates wij could have received.
Trading Inbetween Alt-Coins
Further te our example, wij can see wij spent some of our Bitcoins to buy some Ethereum.
This is an area without clear guidance from the IRS.
Some exchanges of property, real estate for example, are treated spil a like-kind exchange, since they have the same rights, characteristics and obligations.
Te this case there is no tax event and the cost ondergrond is passed from one property to the other. If that were the case with Bitcoin, then purchasing Ethereum would just pass overheen the cost ondergrond, wij wouldn’t have to work out the gains, and there would be no taxes.
However, limitations te what would be permitted under a like-kind, or Section 1031 exchange, would most likely exclude crypto-currencies. It vereiste be for investment or business purposes and cannot be inventory or stock. Also a portion does not qualify if it is exchanged for specie or other property.
While it is unlikely the IRS would permit like-kind treatment, it simply isn’t known for sure. If you do determine to use like-kind you should be ready to recalculate past taxes if the IRS rejects it te the future.
Otherwise, trading one alt-coin for another is treated like selling one coin for USD and then using that USD amount to purchase the next coin. Here wij have effectively disposed of one coin and created a fresh loterijlot for another.
Back to our ETH example, wij can now see our trade of 0.2443 BTC for 400 ETH can be rewritten spil:
The value of x USD becomes the fair value, or market price, of BTC. Wij will typically use the average daily price from some established source, spil long spil wij use it consistently. Say the price wasgoed $100 that day, or at that time on the exchange where wij did the trade, then it is:
However, Loterijlot 1 only has 0.1116 BTC left whereas Lotsbestemming Two has 0.897 BTC.
Wij could, of course, use specific identification and take it from Lotsbestemming Two. Or wij could use FIFO and take all of Lotsbestemming 1 and then a portion from Lotsbestemming Two.
This would give us:
Lotsbestemming 1 is now empty. Loterijlot Two has 0.7643 BTC remaining, and wij have two fresh ETH lots, albeit they can be merged into one of 20 ETH @ $1.2215.
Spil if all this wasn’t complicated enough, wij now also need to include fees te the calculations.
Trading Bitcoins for USD on an exchange often incurs a toverfee. For example, Bitstamp is typically 0.2% and Coinbase is 1%.
Thesis fees can be added onto the cost fundament when buying, and taken from your proceeds when selling. This reduces your gains and so reduces your tax liabilities.
You can see that just buying, spending and trading Bitcoins has quickly become complicated and is now difficult to track the cost poot.
This is why BitcoinTaxes wasgoed created. All the intricacies of capital gains wij’ve seen above are calculated automatically by simply importing your trades from exchanges, such spil Coinbase, Cryptsy or BTC-e, and quickly displaying the results from the different cost onderstel methods.
The 2nd part ter this series will proceed to discuss some more finer issues around Bitcoin taxation, such spil wash sales, calculating losses, income and mining.
The third part will vertoning you how you can use BitcoinTaxes to calculate your capital gains, mining income tax liabilities and what to include on your 1040.