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Bitcoin Tax Record Keeping

Table of Contents

    If I have Bitcoin Income, What Tax Record Keeping Does the IRS Require?

    If you have taken an interest in Bitcoin due to the underlying technology, due to customer demand, or because it seemed like a good investment opportunity there are certain record keeping requirements you must satisfy. While the exact records you keep and submit to the IRS will vary on the basis of your use of Bitcoin,  we can examine a few typical use cases and the various records that should be kept to maintain compliance.

    All Holders of Bitcoin Must Record and Account for Capital Gains

    Regardless of how you use or intend to use Bitcoin, if accept and hold Bitcoin you are very likely to incur an obligation to pay capital gains taxes. This is due to the fact that, in 2014, the IRS held that Bitcoin and other virtual currency must be treated as property rather than as currency. When holding property, people must account for capital gain. Capital gain is accounted for by recording a starting value when the property is obtained and a closing value when the property is sold or transferred. The difference in value is the gain. Generally, gain is realized and comes due in the tax year where the property, in this case Bitcoin, is sold or transferred.

    When Bitcoin is Used to Pay Employees, Payroll Tax Records Must Be Kept

    Some businesses may elect to pay employees in the form of Bitcoin. Paying employees in Bitcoin or other digital currencies does not relieve a business owner and responsible parties of their obligation to account for, collect, hold, and pay over payroll taxes. Per IRS instructions, parties are instructed to keep employment tax records for a minimum of four years. However, when records are connected to property, the IRS states that records should be kept until the period of limitations expires for the year in which you dispose of the property.

    I Have Received Bitcoin as Income, What Records Do I Need to Keep?

    If you were paid in Bitcoin for services performed and are not an employee, it is highly likely that you will need to account for capital gains, income tax, and self-employment taxes. While basic details for capital gains and income tax are set forth above, a self-employment obligation can be reported via Schedule SE of IRS Form 1040. You can utilize the 1099 provided by your employer to determine the correct numbers to report. Once again, since the reporting is connected to property, it is prudent to keep records for the latter of four years or  until the period of limitations expires for the year in which you dispose of the property.

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