Tax season is upon us! And this year, many may for the first time have to account for bitcoin acquired over the year as the cryptocurrency had a year of user growth, especially in regards to retail. Many companies chose to accept the currency, including major players Overstock and Microsoft. Because of the spike in accepting retailers, it is likely many actually spent their bitcoins this year.
Because the IRS considers bitcoin a property, similar to a company stock, if a person experienced an increase in value it must be reported as income. However, because the currency in reality experienced a steady decline in value, it is likely the majority of bitcoin owners did not experience any gains and therefore don’t owe any taxes.
A piece published by CNNMoney points out that these transactions may become complicated to account for come tax time. Take the example given below;
Let’s say you’re the average person who dipped toes into Bitcoin, maybe buying a single bitcoin and spending some of it on a few items throughout the year.
You’ll have to compare the value of the original bitcoin with the value of the portion you spent.
For example, let’s say you bought 0.1 BTC for $60 in July and the value fell to half in October. That’s when you spent it at a high-tech bar. That portion was then worth $30. You experienced a $30 loss.
Now repeat that over and over again.
As the piece points out, these types of trivial transactions are difficult to account for as it requires a full history of all transactions made through all of a person’s wallets. Losses can be claimed on personal tax returns up to $3,000 per year. Good for the casual Bitcoin dabbler, bad for the large-scale investor.
Bitcoin experts recommended LibraTax, a free automated bitcoin calculator which can account for up to 500 transactions across multiple wallets.
To read the full Bitcoin Tax Guide, click here.