Digital currencies such as bitcoin are taxable. The U.S. Internal Revenue Service (IRS) considers cryptocurrencies as capital assets similar to stocks and bonds and requires it to be accounted for at tax time.



“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency”, says IRS guidance notice 14-21.



In an article published on Forbes, Laura Shin explained the various instances associated with virtual currencies that a user should bear in mind for tax calculation purposes.



Firstly, in case of miners, who are rewarded bitcoins for successful creation of a hash for a block of transactions, the fair market value of Bitcoin issued on a particular day must be recorded and marked as an addition to their personal or business income. Shin says that miners should also record the date and timestamp at which the coins were mined. Later when the bitcoin is disposed of or spent, they need to subtract the date of acquisition from the date of disposal and will be taxed a long-term capital gains rate on any Bitcoin they held for over a year, and a short-term capital gains rate on any Bitcoin held for a year or less.



If bitcoin is received via payroll, it is considered as an income and the receiver needs to record the date and the fair market value. Similar to mining, here also, the receiver will be taxed for long- or short-term capital gains depending upon the period for which the bitcoin was held.



In case of tipping or gifting, the sender of the tip is considered a gifter and his gain/loss is transferred to the receiver. Shin writes, “If you are gifting Bitcoin to someone, you will not pay taxes on gifts up to $14,000 per year per recipient. However, it’s best for the receiver if you tell her the cost basis and date of the acquisition, especially if you are gifting her a large amount.”



While trading bitcoins, there is no immediate taxable event, but traders have to record the fair market value and date. The taxable event occurs when the bitcoin is either sold or used for payment. Shin suggests that traders should check with their exchange to find out if it issues a 1099-B report at the end of the year, which will identify their gains and losses.



Users can avoid paying taxes on the gains by donating those coins to a registered charity that accepts bitcoins and getting a proper receipt.



When deciding which bitcoins are being disposed of, users have two accounting options: first in first out (FIFO) or last in first out (LIFO).