As the value a single bitcoin currently exceeds $8,000, bitcoin owners are increasingly on the radar of the IRS. The IRS has issued guidance (IRS Notice 2014-21) that it considers virtual currency to be property, subject to capital gains tax on profits. The IRS is also pursuing, in federal court, Bitcoin owners who traded bitcoin at the Coinbase exchange without reporting gains. Over the last few years, we have advised bitcoin owners on IRS compliance as well as how to lower their capital gains from bitcoin profit.
If you own bitcoin, here are a few important considerations:
When you sell your bitcoin and make a profit, this is a capital gain and is taxable. One should report bitcoin gain on IRS Form 8949 which is then attached to Schedule D of Form 1040. The IRS also considers the exchange of bitcoin for goods or services to be a taxable event, the value of the good or service, less the cost basis (purchase price) of the bitcoin.
If you own virtual currency in a foreign account or wallet, there are a set of additional IRS reporting requirements, whether or not you made a profit. The account is probably reportable on two separate forms: first, a form called the “FBAR”; second, IRS Form 8938. If you invested in a foreign fund that invested in bitcoin, the IRS may consider the fund to be a Passive Foreign Investment Company (“PFIC”) that has its own tax methodology, including IRS Form 8621. Penalties for failing to report foreign assets including virtual currencies are steep, including 50% of the value of the account.
We advise many clients on IRS compliance for their bitcoin (and other) assets, and we also advise them on legal tax minimization strategies for their bitcoin gains. One popular strategy is a Charitable Remainder Trust. By contributing appreciated virtual currency to a Charitable Remainder Unitrust, you are entitled to a charitable deduction, regular payments from the trust back to you during the trust term, and at the end of the term, a percentage of the assets passes to the charity, are not subject to income tax and are removed from your estate.
Please contact us to discuss any tax or other compliance issues related to bitcoin.
Please also see our prior articles on bitcoin: