Filing your tax return correctly is not exactly fun, we know. To keep the pain to a minimum, use this article as a guide to discussing bitcoin with your accountant. By the way — if you take a do-it-yourself approach to taxes, this article will still point you in the right direction.
Important Note: We cannot provide professional advice regarding your specific tax situation. If you are unsure about your obligations, we recommend seeking expert advice. This article provides general information about bitcoin only.
Why Your Accountant Will Ask You About Bitcoin
Whether you are a daily bitcoin buyer or not, buying it may be relevant for your taxes. As a general principle, the more bitcoin buying and selling you do, the more important professional tax advice becomes. For example, if you buy $100 worth of bitcoin this year and use that balance to buy new DVDs or electronics, your bitcoin buying activities will probably have minimal impact on your taxes. On the other hand, if you earn your income through bitcoin trading, it will have a major impact on your taxes. In either case, it is best to err on the side of caution. Use this article to think through the implications of buying bitcoin.
A Short Definition of Bitcoin for Your Accountant
Let’s start with a short bitcoin definition from our article, What is bitcoin?, that you can use to begin the conversation.
Bitcoin is a cryptocurrency. As such, it can be used like any currency (e.g. U.S. dollars or gold) as an investment, as a store of value, to make payments, and to send or receive money. Because it is a digital currency, bitcoin is pretty much like email for money. The same way anyone can create an email address to send and receive messages, anyone can create a bitcoin wallet to hold, send and receive money with just a smartphone and a data or internet connection.
Unless your accountant is particularly curious, there is no need to dive into blockchain and the technology underlying bitcoin (I mean, feel free, but most accountants charge by the hour). As noted in the sources section, the IRS has published guidance concerning bitcoin and other “virtual currencies.” That means your accountant has to consider your bitcoin property and activities when providing advice to you.
Accounting and Tax Questions for Individuals Buying Bitcoin
If your accountant is completely unaware of bitcoin, encourage them to read Bitcoin 101, this article, and the sources provided below. Be sure to cover the following questions:
- Why are you using bitcoin?
- Have you earned income from trading bitcoin? (As noted earlier, this is a critical question that may require professional advice.)
- Are you paid in bitcoin? (Think broadly on the point – wages, salaries, part-time work, freelancing, and beyond.)
- When did you buy bitcoin and when did you sell? (As noted in CPA Practice Advisor, timing issues are important in the tax code).
- What will happen to your bitcoin if you die or divorce? You don’t want to lose control of your digital currency simply because you forgot to think about it.
- Do you have a record of all your bitcoin balances? This point is important if you use multiple bitcoin wallets. Your accountant cannot give you proper advice if they do not have the full picture of your finances.
- Have you donated bitcoin to a charity? Before you make this donation, check with your accountant to find out what impact this may have on your taxes. You can be sure that this couple did!
Bitcoin is an increasingly popular investment vehicle. To minimize the pain of penalties and audits, though, make sure that you request tax advice regarding your bitcoin.
- IRS Virtual Currency Guidance : Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply (IRS Publication)
- The Classification of Bitcoin and Cryptocurrency by the IRS (CPA Practice Advisor)
- When Trading in Bitcoin, Keep the Tax Man in Mind (New York Times)