Bitcoin Tax FAQs

The old cliché referencing death and taxes as the only constants in life may, unfortunately, apply to the modern cryptocurrency market. Bitcoin and other forms of crypto can be taxable in many circumstances. When in doubt: if you’ve generated any income with virtual currency, you probably owe taxes on that income. Still confused? You’ll find answers to your most pressing crypto questions below:

Does the IRS view bitcoin as property or currency?

As far as the IRS is concerned, crypto is exclusively property — not currency. This distinction might not seem like a big deal, but it can make all the difference for your annual tax obligation. Like any property, gains and losses involving cryptocurrency must be reported to the IRS and taxed appropriately.

What is a realization event?

How crypto is taxed depends on what the IRS terms a realization event — an exchange that allows a financial gain to become taxable. Sometimes referred to as taxable events, these can include a variety of activities involving the exchange or sale of cryptocurrency. Common realization events include:

  • Mining bitcoins
  • Selling cryptocurrency in exchange for cash
  • Trading one cryptocurrency for another, especially if the final crypto exceeds the original value

How is the cost basis defined and determined?

The term ‘cost basis’ refers to the original value of assets — in this case, crypto assets — for tax purposes. While there is no one method available for determining the cost basis for all crypto users, exchanges increasingly look to IRS Form 1099-K for assistance. Without this form, the process of determining the cost basis may involve scouring past exchanges with the help of a weighted index. Miners should opt for the value of the currency on the day it was received. Those who mine for third-party services may receive independent contractor payments and related 1099 forms.

Still confused about the interplay of cryptocurrency and the IRS? You’re certainly not alone. The experts at the Highland Tax Group can provide valuable counsel as you navigate the complications of Bitcoin taxes. Reach out today to get started.