The Bitcoin Investor’s Guide to Taxes

The signs of early spring are here and they include warmer weather, pollen and hay fever, putting the winter coats away, and TAXES.

Bitcoin investors and lenders, especially those in the US, have some quirky laws that they have to deal with in order to stay compliant. As I talked about in a previous post, Bitcoin is taxed like property in the US. This means that we have to do the same things with Bitcoin that we do with stock and bond investments and we have to track them the same way without the benefit of a Fidelity or Vanguard or Goldman Sachs to help us.

DISCLAIMER: I do finance for a living but I am NOT a CPA. Please doublecheck with your own tax and financial advisors.

Step 1: Track Your Purchases and Sales

The first thing you need to do in order to accurately assess your tax liability in BTC is to track your purchases and sales of BTC. I have a spreadsheet that I put together that looks like this for tracking purposes:

BTC Buy Sell

Just like with stocks, when you buy 1 BTC for $650 (which you may have in Summer 2014 like I did) and sell it for $325 (which you may have in December 2014), you would be left with a $325 capital loss. Capital losses can be written off against Income and Capital gains are taxed at their own rates depending on if they are short term or long term gains.

Short term gains, held less than 1 year, are taxed at your ordinary income tax rates. So if your tax rate is 28%, then that is the tax you pay on your short term capital gains. Long term gains, held more than 1 year, are taxed at 0, 15 or 20% for most tax payers. Long term gains are usually taxed at a lower rate.

Where do you log this information in your spreadsheet to determine your capital losses or capital gains? on IRS Schedule D.  This is the form where you determine your total losses or gains and whether they are long term or short term. If you look at the form, you can see in Part III that the amount of gains or losses (with certain exceptions) goes right onto your 1040 form to increase or decrease your potential tax liability.

Remember, on purchases, you are only taxed when you sell OR if you received BTC as payment for services then you have to track the BTC/USD rate on the day you received your payment so you can accurately reflect your business revenues and then again when you sell.

Step 2: Track Interest Earned

If you lend your coin out like I do, then you need to track your interest earned. Are you tracking it? So far, every attempt by the Bitcoin lending platforms to track Interest has been incorrect, although some are closer than others.  Here is how I track mine per loan:

BLC Loan Port View

This will require your spreadsheet and your loan platform to calculate your Interest on an ongoing basis.

Interest goes on a different form than Capital Gains/Losses does. Interest goes on the Schedule B form of the 1040. Looking at the form, you see that Interest goes in Part 1 and line 4 of Total Interest Earned goes right to your 1040. This means that Interest is taxed as Ordinary Income, just like your short term capital gains. It's taxed at your own personal marginal tax rate.

Step 3: Track Defaults

The easiest way to track your defaults is through Schedule D directly OR Form 8949. Form 8949 tracks the Sales and Disposition of Capital Assets.  Virtually all Bitcoin defaults are short term so you could go direct to the Schedule D or you can fill out this form and move the loss from your defaults to your Schedule D, which would move through to your 1040 and reduce your tax liability.

No one likes thinking about these defaulted loans but you can and should take advantage of the tax laws to write off these losses against income you have earned.

All of the lending platforms have good data on the defaulted loans so take advantage and use it.

Lastly, remember, only Interest Earned, Gains/Losses Made and Defaults before year end 2014 count for this tax year.

This is by no means a complete guide, however, there should be enough here to get you started and gather some information to make it easier for you and your CPA and cheaper  for you if the CPA doesn't have to track this down themselves.

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

6 thoughts on “The Bitcoin Investor’s Guide to Taxes

  1. This might be a stupid question, but if BTC are considered property, why are those you earn from lending not also reported as capital gains?

    Also, as long as your BTC are not exchanged for fiat or goods/services, you do not have to report this information in your taxes?

    • This is not a stupid question at all. In fact, its a great question to show how confusing the laws are.

      Like most BTC transactions in the US there are 2 transactions when we lend.

      1) When you earn from lending, that is Interest just like bank interest.
      2) When you sell that coin that you have earned (which has a cost basis of zero) then you have to pay capital gains based on the sales price.

      If your BTC are not exchanged for fiat or altcoins or goods/services then you only have #1 above, the Interest earned, to worry about. This is exactly the same as if you bought Disney stock for a child and they never sold it. If they never sell, then there is never a gain. Same for us.

      Thanks for the excellent question.

  2. Hi Stu,

    I have a question as well. It’s my understanding that since Bitcoin is considered property in the U.S., it falls under “swaps” when lending. Therefore, you have to keep track of the value of the bitcoin at lending and when the loan comes due you have to record the new value of the bitcoin. (Capital Gain/Loss recording #1). The portion of bitcoin that is interest has the new cost basis as well – plus you have to pay interest on that income.

    Thoughts? And…how in the heck does one keep track of this on the exchanges? (One “loan” to a margin exchange can generate 100 micro transactions in a day.)

    • Chris, great question. Sorry for the delay in response.

      Understand that I am not an accountant or a tax pro so please consult yours to confirm what I think to be true in the post and this response.

      What I do is create a spreadsheet and put the day I initiate the loan and the day the loan pays out since most are less than one year. I use one of any number of places to track the historical BTC price like Coindesk or Brave New Coin.

      You only have a capital gain or loss when you sell your BTC back for USD. Otherwise, you only have Interest Earned and I take the Interest Earned at the historical BTC price. For example, I have a loan where I earn 0.5 BTC and on the day the loan pays out the BTC price is $400. This means I have 0.5×400 or $200 worth of Interest Earned for your Sch B (Interest and Dividends) of your 1040.

      So you have to deal with your ‘new’ cost basis on the Interest you have earned only when you sell back for USD.

      As for exchanges, Bitfinex has good organized info on your transactions and it does seem like you can organize your Interest Earned as well as Capital Gains or Losses from trades. I can only speak for them as I don’t use other exchanges. You can download all your transactions from BFX and thats where I would start.

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