News IRS Sees Bitcoin Transfers as ‘Taxable’ Events [UPDATE]

Editor’s note and technical retraction: The original version of this article published December 2 inaccurately represented comments made by Daniel Winters. We have removed these and updated the article accordingly. We would like to apologize to our readers and hope to clear up any confusion below.

Given the recent request by the IRS for cryptocurrency exchange Coinbase to hand over customer information, Bitcoin users should be aware that they’re responsible for determining which transfers are “sales” in their tax reports.

Also read: ANTONOPOULOS TALKS ETHEREUM AS REGULATIONS BITE BITCOIN

User Must Specify ‘Sales’ to IRS

Recently, Bitcoin users raised concerns when the Internal Revenue Service (IRS) requested Coinbase to hand over user information between 2013-2015, calling the move a “dangerous precedent.” Then a California district court upheld this request to pry into the transaction records of the San Francisco based exchange.

"Most Bitcoin users were probably not aware that they were supposed to record losses and gains as taxable events."https://t.co/KGq58tVZRX — William Sweet CFP® (@billsweet) November 21, 2016

Coinbase provides a tool for users to generate a report on incoming and outgoing transactions, which does not get sent to the IRS. Coinbase support states:

We use a FIFO (first in first out) method for this report.Transactions sending into or out of your Coinbase wallet are treated as buys or sells at the current market price in this report.

But while this report considers these transfers as a sale, it is up to the user to specify which transfers are actually sales. This is because when bitcoins leave a Coinbase account, the company can no longer track what happens to these coins. At the same time, this approach ensures that the exchange remains compliant with US regulations.

Simply put, the user must report a transfer as a “sale” if the bitcoin left the coinbase account and cashed out. The inverse is true with inbound bitcoins, which one should report as income if it’s income. Moreover, even transfers involving the purchase or sale of bitcoin on LocalBitCoins or from peers, for example, should also be reported to the IRS.

‘Taxable’ But Not Every Transfer is a ‘Sale’

In 2014, the IRS issued a notice clarifying that it treats digital currencies such as Bitcoin as capital assets and are therefore subject to capital gains taxes. “The notice provides that virtual currency is treated as property for U.S. federal tax purposes,” it reads. “General tax principles that apply to property transactions apply to transactions using virtual currency.”

The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

Thus, not every transfer of funds is considered a sale. For the user, sending bitcoins from a Coinbase account to their Trezor hardware wallet, for example, is only a transfer and not a sale since the user is still in possession of the coins.

“You should keep your own records for best results and update the report accordingly,” Coinbase support explains. “For example, if you transfer funds offsite to a desktop wallet, and then back again, you would not count this as a sale of digital currency.”

Also, if you spend a bitcoin online that is $100 USD higher now than when you bought it, for example, you should mention this $100 gain in your report as well. Thus, while outgoing transactions are technically “taxable,” it is up to the user to specify which inbound and outbound transactions are income and sales, respectively.

The IRS has released guidelines on how to report your Bitcoin-related taxes. You can read them on the official IRS.gov website here.

Getting Help

Though Coinbase does provide its users with the ability to generate a transaction report, you’ll need a third party tool to process the bitcoin transferred out of Coinbase to other wallets or exchanges.

Tax services can help to accurately calculate your capital gains and losses. Though this process will still be cumbersome as you will have to keep a record of all your transactions involving every address that you used to transfer funds, help is available such as:

Given the current uptrend in the Bitcoin price, the world’s first cryptocurrency, also known as “digital gold,” is becoming increasingly attractive for all types of investors. Therefore, users must be aware of their responsibility when reporting their Bitcoin-related activity, particularly in the US.

Non-US residents can check Bitcoin’s legal status in their country here.

Will these developments prevent you from using Coinbase? Do you know other services to help with Bitcoin taxes? Share below!

Images courtesy of twitter, optimataxrelief.com