Bitcoin and Taxes: What You Need to Know About Cryptocurrency and the IRS

January 29, 2018, 4:49 PM UTC

The IRS is now receiving 2018 returns, giving taxpayers until April 27 to file and pay. The process won’t be much different from last year, though if you’re one of the millions of investors who jumped into the cryptocurrency craze, you may have extra work to do.

Here’s a plain English Q&A from Fortune’s The Ledger on how the IRS handles profits and losses related to bitcoin and other types of digital money. This is not tax advice—for that go see an accountant or, better yet, a tax lawyer—but a quick overview of the main issues.

I made money in 2017 selling cryptocurrency. Do I have to declare it?

Yes, no matter what your Internet chat group might say about bitcoin being beyond government control, the reality is crypto profits are income and Uncle Sam expects his cut. Sure, only 802 Coinbase customers declared bitcoin income in 2015, but rest assured the IRS isn’t letting this slide—especially since crypto assets rose so dramatically in 2018.

How much do I have to pay?

In the eyes of the IRS, cryptocurrency is property like shares or physical assets. That means you pay the long-term capital rate (typically 20%) if you sold it after a year, or the ordinary income rate if you sold it before then.

What if I took a loss?

Given that the big crypto correction only really happened in 2018, most investors are unlikely to have sold for a loss in 2017. But if you’re one of them, you can use those losses to offset capital gains or up to $3,000 of ordinary income. Also, you can carry losses forward to next year.

What if I just sent some of my bitcoin (or Ethereum, etc) to a store or a friend?

Tough luck—any time you divest cryptocurrency, it’s a taxable event. The IRS doesn’t care if you sold bitcoin for cash or bought a muffin with it; if it was worth more than you paid for it, you owe tax.

What if I traded one type of cryptocurrency for another?

Again, tough luck. The IRS recently closed a potential loophole for “like kind exchanges” that let people swap assets of the same kind without triggering a tax obligation.

Ok, so where do I declare my crypto earnings?

According to a TurboTax accountant quoted by the New York Times, you should use Form 8949 to add it all up, and report it on Schedule D, along with any other capital gains.

Can I donate bitcoin, etc. to charity to reduce my tax bill?

Yes, that can be a great tax strategy. (This piece by Fidelity Charitable has a good explanation on how that works.) But, unlike an IRA contribution, it’s already too late to do this for the 2017 tax year.

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Will Coinbase or other exchanges send me a 1099 or other form to show my gains?

Probably not. In the case of Coinbase, the company is only sending 1099-K to big fish or institutional investors. But the site and other popular exchanges provide a transaction record that shows the dates and amounts when you bought and sold—you can use these to calculate the amount you owe.

Also note that, according to Suzy Walsh of the law firm Murtha Cullina, you should use the FIFO (“first in first out”) accounting method to score gains and losses if you’ve bought and sold multiple times.

What about Bitcoin Cash or other currencies I received after a fork?

If you owned bitcoin prior to July, you received an “airdrop” last year when a group of miners introduced a so-called fork and created Bitcoin Cash. This created a windfall by delivering one unit of Bitcoin Cash for every bitcoin—but also a minor tax nightmare, since no one is quite sure on how to report such airdrops to the IRS. It’s unclear if the arrival of Bitcoin Cash was like a dividend, on which tax is owed, or if people only must pay when they sell it.

Will the IRS really care about little old me and my small amount of bitcoin?

“It’s like everything else. The chances of an audit will depend on whether your return is unusual for other reasons. And if you’re a big fish, you’re likely to get swept up,” said Walsh, the attorney.

Meanwhile, keep in mind that Coinbase is the only exchange for which the IRS has publicly asked for customer records. But it’s highly likely that the agency is also making similar demands of Kraken and other major cryptocurrency services.

Where can I read more about this?

The New York Times explainer referred to above is helpful, as is this short blog post by Coinbase. Unfortunately, the country’s largest tax software provider, Intuit, did not reply to repeated request for comments about how specifically it is helping cryptocurrency owners. The company does, however, have a general overview on bitcoin and there are many discussions on its user forums.