It’s no secret that the Internal Revenue Service (IRS) is starting to crack down on cryptocurrency traders who it suspects have been misreporting the digital asset on their taxes. The agency has reportedly sent out more than 10,000 warning letters, including 6174 and CP2000, alerting cryptocurrency traders who may have misreported the asset on their tax returns.
With bitcoin’s 2019 price rise and increase of more than 180 percent in the year to date, it’s likely that many traders have incurred capital gains that will need to be reported on their year-end tax returns.
How Is Bitcoin Taxed?
Bitcoin and other cryptocurrencies are treated as property in the eyes of the law not as currency. This means that cryptocurrencies are subject to capital gains and losses tax rules just like other forms of property — stocks, bonds, real estate, etc.
What Is a Bitcoin Capital Gain or Capital Loss?
A capital gain is simply the rise in value of a capital asset. In the world of bitcoin and cryptocurrency, you incur a capital gain when you sell or trade a coin for more than you acquired it for. Just as if you sold a stock or a piece of real estate for more than you bought it for, you owe a tax on this gain.
For example, if you purchased 0.1 bitcoin for $2,000 in April 2019 and then sold it two months later for $3,000, you have a $1,000 capital gain. You report this gain on your tax return, and depending on what tax bracket you fall under, you will pay a certain percentage of tax on the gain. Rates fluctuate based on your tax bracket as well as depending on whether it was a short-term or a long-term gain.