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Should you be reporting Bitcoin on your tax return?

If you’re a US taxpayer and you sold bitcoin at any time during 2014, then the answer is yes, you should. This is because last year the Internal Revenue Service issued Notice 2014-21. This notice declared Bitcoin a capital asset. Anytime you have a capital asset you always have to keep track of the price you buy it at and the price you sell it for.

This is because depending on how long you own a capital asset, if you sell it for more than you bought it for, you pay different tax rates. If the time between when you bought and sold it was less than a year, you pay a short-term capital gains rate. If the time between your buy and sell was more than a year, you pay a long-term capital gains rate.

If you don’t report your Bitcoin transactions and you ever get audited for 2014, one step the IRS always takes during their examination is to analyze your banking and credit card statements. During this step, the auditor will see your deposits or withdrawals to/from places like Coinbase or BitPay – this in turn, shows that you were using Bitcoin.

What if you bought bitcoin in 2014 but when you sold it, it was worth less than you bought it for? You should still declare it, because you can write-off the loss, up to $3000. This means that for any other income you received in 2014 – from your job for example – you can write-down up to $3000 of the income from it (the maximum allowed capital loss, assuming you lost $3000 or more with bitcoin).

Once you’ve determined whether or not you should be reporting Bitcoin on your tax return, it’s important to also know the correct way you should be doing it. This can be a bit challenging, because most transactions are not equal. For example, let’s say that during 2014, you had approximately $300 worth of bitcoin that you had aggregated via several different purchases at different points throughout the year. Toward the end of 2014, you started buying different things – coffee here, a dinner there, etc., and so on. In most cases the redemption amounts (when you bought the various things) are not going to match up to the purchase amounts (when you acquired the bitcoin). For this, you need to determine what’s called a cost basis.

There are several different cost basis methods you can utilize – FIFO, LIFO and Selective (we call this “Libra-Optimized”). FIFO means that for your sales of bitcoin, you correlate it with the first bitcoin purchase you made. LIFO means you correlate it with the last bitcoin purchase you made. Selective means that you are going to correlate it with the purchase price that will either give you the smallest reportable gain, or if none, the largest reportable loss.

All of this stuff can be quite a bit of work to crunch and calculate. And when you’re done, you have to use a special form to include with your tax return called an 8949. This provides somewhat of a ledger of your various bitcoin transactions, detailing when you bought and sold, reconciling them to the cost-basis method you used.

Does all of this sound like a headache? Don’t worry, because this is exactly why we made LibraTax. LibraTax automatically imports all of your Bitcoin transactions so you can calculate your overall gain or loss – we’ll even auto generate your tax form for you to include with your return or to give to your CPA.

With LibraTax, everything can be done in minutes.

We’re free to use, and should you so choose, you can even use our app anonymously.