Last year for our anniversary we headed down to Charleston, South Carolina. As we drove through a small town, we saw a billboard advertising how a local breakfast spot was offering its own unique payment system, inspired by Bitcoin. Even though that may not be the right way to think of blockchain, I believe it illustrates the large shift in awareness that people have with cryptocurrency in general.
We live in a world with multiple types of cryptocurrency, the most popular and well-known being Bitcoin, which can now be used for online purchases. With some apps you can even use Bitcoin to pay your rent, crazy right?
While the volatility of it’s worth makes some people see it as a game, it can be used as currency. Because of that, there are some financial considerations, especially when it comes to taxes. This is fairly new and still changing as cryptocurrency matures, but there are some guidelines that can make things easier for you come tax time.
How Do I Report Bitcoin on my Taxes?
Even though it’s digital, the IRS expects you to report your Bitcoin income. (If it was tax-free money, you better believe even more people would be jumping into it!). According to the IRS, Bitcoin is considered an asset and not a currency. How you’re taxed is based on how you use your Bitcoin income.
Keeping good records is key because depending on how long you held your Bitcoin before selling it, your profit may be taxed as short-term gain or at a lower rate if it was a long-term gain.
The same goes for your rent, since you have a taxable event when you use your Bitcoin to make the payment and you would be taxed as if you sold the bitcoin you’ve been holding on to. If you made a profit when you used Bitcoin to pay your rent, the profit would be taxed as either a short-term gain or the lower long-term gain rate.
Depending on your work (especially freelancers working in tech), you may have a client who pays in Bitcoin. If that’s the case, then the Bitcoin received will be taxed as self-employment income if you are self-employed. If you are an employee, it will be included in your wages on your Form W-2.
Reporting Bitcoin is not as stressful as you may think. The key is keeping really good records (blockchain for the win!) of when you buy and sell.
Thoughts on Bitcoin
Don’t worry about knowing the tax laws. TurboTax has you covered and will ask you simple questions and give you the tax deductions and credits you’re eligible for. If you have questions at tax time, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent to get your tax questions answered.
With bitcoin a part of our conversation, I’d love to get your take on things. Have you used bitcoin? Have you paid bills with it?