Individual Taxation and Crypto-Currency trading in the U.S.

[Hodor]

I've been forced to research this and address on my own taxes since I started trading BTC, and then of course, Ripple.  We're no where near the end-of-year tax time, but I wanted to start this discussion since I know there are many of us who have had to figure it out without much formal guidance.  The first piece of advice I have for anybody who is reading is to get a tax professional's advice. 

They don't cost much compared to what a fine or penalty would cost. That is my single most valuable piece of advice, but I will of course share what I know on this thread as well, albeit it will be my own interpretation of how I understand tax treatment of these transactions second-hand. 

[Hodor]

https://www.irs.gov/uac/newsroom/irs-virtual-currency-guidance

• Quote

   

  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.  Normally, payers must issue Form 1099.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

   

  This is the core "source" page for the IRS guidance on virtual currency, and it's important for all hobbyists and traders to familiarize themselves with the basic concepts, as the IRS has repeatedly ruled in the past that "ignorance of the law" (or in this case "guidance") is not a valid excuse in taxation cases. 

 

[Hodor]

Here is the often-quoted IRS Notice 2014-21:  https://www.irs.gov/pub/irs-drop/n-14-21.pdf

I recommend the above reading prior to doing your taxes; here is a Forbes article that highlights some of the content: 

http://www.forbes.com/sites/laurashin/2015/12/16/bitcoin-at-tax-time-what-you-need-to-know-about-trading-tipping-mining-and-more/#4787c9166924

Quote

According to IRS guidance notice 14-21, Bitcoin and cryptocurrencies are capital assets, similar to stocks and bonds. “That means that for Bitcoin, and any existing cryptocurrency, the framework that applies to gains and losses, and the taxation and accounting of capital assets applies to cryptocurrency too,” says Benson.