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How to File Taxes for Virtual Currency



It is now clear that the IRS is making virtual currency a central audit focus.

In 2014, the IRS issued its first guidance on virtual currency, which stated that virtual currency is treated as property for federal tax purposes (like stocks). (IRS Notice 2014-21). Transactions involving virtual currency must be evaluated to determine whether there is a capital gain/loss for both short-term (tax rate 10% to 37%) and long-term (tax rate 0% to 20%) holding. The Form-8949 was used to report the gain/loss.


The most common tax form is a 1099-B, and the exchange that manages the currency will normally send you one when you sell a virtual currency. However, you may also receive a 1099-MISC, 1099-K, or a similar document that lists the value of the currency.


Taxpayers must use the first-in, first-out (FIFO) method for determining the gain on a sale/exchange of virtual currency unless the taxpayer identifies specific units of virtual currency sold.


When you receive virtual currency as payment for services, the value of the currency, on the date you receive it, is treated as income on your federal income taxes for that year. Changes in the value between the date you receive it and the date you actually file your taxes will not affect your taxes. You may receive a W-2 or 1099 Form with the currency’s tax value. If you sell your virtual currency in the future and make a profit over your cost basis, then you will pay capital gains taxes.


In case of mining virtual currency, it is treated as taxable income, and if you is involved in the trade or business of mining, then the income is subject to self-employment income.


The IRS has also indicated that there is no income recognized when a taxpayer:

  • Receives a gift of virtual currency (without selling)

  • Exchanges virtual currency between digital wallets, accounts or addresses all held by the taxpayer.


In case your broker does not generate the report for you, you can use these link below to generate the Form-8949 for filing tax return:


References:

www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions


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