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Bitcoin Income: Exploring Capital Gains & Stock Value | H&R Block
January 12, 2018 : Mike Slack
Editor’s Note: This article has been repurposed as part two of our four-part series.
The focus of this section is to discuss the fiscal responsibilities one could expect when investing in Bitcoin and similar cryptocurrencies.
In published guidance, the IRS has clearly stated that convertible virtual currencies, such as Bitcoin, are treated as property for tax purposes, and should not be treated as foreign currency.
As a property, it will be subject to the same general rules regarding when it should be included in gross income, the character of gain or loss, the basis of the Bitcoin, etc.
Read on as we explore the fiscal hurdles one could expect when investing in Bitcoin.
How to Invest in Bitcoin
One of the most common uses of Bitcoin includes purchase for investment purposes.
If a taxpayer purchases Bitcoin for investment purposes, the tax treatment is similar to buying and selling stock.
The taxpayer’s basis in the currency is the adjusted basis (the cost basis + commissions) or other purchase fees. The taxpayer’s holding period begins on the date he or she purchases the Bitcoin.
The sale or exchange of the purchased Bitcoin causes the taxpayer to recognize a capital gain or loss.
How to Invest in Bitcoin
Individuals report capital gain or loss from the sale of Bitcoin on Form 8949 and Schedule D.
John bought one Bitcoin for $800 on January 14, 2014, and paid a $10 purchase fee. Thus, John’s basis in the bitcoin is $810.
On April 1, 2017, John sold the Bitcoin for $1,100.
John recognizes a short-term capital gain of $290 – this is the difference between his adjusted basis in the Bitcoin and the amount he realized from the sale.
He reports the transaction on Form 8949 and carries the total of his short-term gain or loss from all transactions to Schedule D.
Decoding Bitcoin Stock Value
Although buying and selling Bitcoin for investment purposes is similar in nature to the buying and selling of stocks, Bitcoin is not a stock or security any more than it is a foreign currency.
Thus, the sales transactions will not be reported to the IRS and to the taxpayer on Form 1099-B.
Furthermore, the sale of Bitcoin is not subject to the same anti-abuse rules, such as the wash sale rules under §1091, which prevent a taxpayer from recognizing a loss on the sale of stock or securities if he or she purchases substantially identical stock or securities within 30 days before or after the sale.
Because those who purchase are not likely to receive information documents, it is especially important that taxpayers who invest in Bitcoin maintain a detailed record of their virtual currency transactions in order to ensure that they properly report the gain or loss on their income tax returns.
Bitcoin Income Next Steps
You have officially reached the third of four parts in our Bitcoin series.
In our final article Bitcoin, Taxes & the Modern Entrepreneur, our Tax Pros will review self-employment scenarios where Bitcoin is taxed.
If you find yourself wondering about how your own cryptocurrency investments will be taxed, meet with your local H&R Block Tax Pro or join the conversation in our H&R Block Community.
Mike Slack, JD, EA, is a senior tax research analyst at The Tax Institute.
Mike leads research teams focused on business and investment tax issues.
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