If you have bitcoins or other digital currencies like Ripple and Litecoin, the Internal Revenue Service considers and expects you account them at tax time.
The chief executive officer and founder of Libra Tax, Jake Benson stated, “If you’re not doing the accounting, you are on the line for tax evasion or misfiling.
The reason you’d want to account for your bitcoin and the gains and losses is the exact same reason you need to do it when you trade stocks. If you don’t, you’re breaking the law.”
Below are seven ways that one may come into possession and/ or dispose of Bitcoin and other digital currencies and how the person needs to account for them at tax time:
Mining – New bitcoin are issued by the system for approximately 10 minutes by a process known as mining. In mining, the computers run the bitcoin software worldwide in order to solve mathematics problems and the first computer to come up with the solution adds the most recent transaction to the ledger of all Bitcoin transactions.
Minting – When digital currency are created out of thin air that is when minting occurs. After that the company or person that creates the protocol or technology behind this new virtual currency need to record the same information: the fair market value of the new currency when the currency is created along with that the date and time stamp at which the coins were minted.
Earning – If bitcoin is earned by exchanging goods or services, one can also record the basis as the value of the item that the person has received.
Spending – When one spends bitcoin, that person must record a short- or long- term capital gain, based on the original cost and holding period.
Tipping/Gifting – When people send tips through an Internet service such as ChangeTip, it enables the people to send each other small amounts like $3, $1 or $0.25. The one who send the tip is considered as a gifter and the gain or loss the person has experienced us then transferred onto the receiver.
Trading – Trading is just like buying or selling a stock. There is no immediate taxable event but one has to record the fair market value and the date. The taxable event occurs upon disposition – either when the person sells it or pay with it.
Donating – One can avoid paying taxes by donating the coins to a registered 501 (c)3 charity that takes Bitcoin and gets a proper receipt. The person can write off the total amount of the donation. Save the Children is one of the agencies that receives millions of dollars in aid each year. The first time the organization received bitcoin donations was after a highly destructive typhoon hit the Philippines in the fall of 2013.