The IRS currently requires that bitcoin and other cryptocurrencies be reported as personal property and capital assets.
The IRS has published guidance that, yes, you do have to report gains/losses/income in the form of bitcoin and other “convertible virtual currencies.” Generally, the IRS treats bitcoin as property, instructing taxpayers to follow the existing IRS guidelines for personal property taxation. You can claim them as a capital asset, allowing you to treat them as stocks, essentially, with the ability to only pay long-term capital gains taxes on them if you hold them for a while. You can get paid in bitcoin by your employer, but employers must still withhold the usual amount of taxes, and you must report your bitcoin income the same way you would your regular income.
It is also possible to hold bitcoin and other cryptocurrencies within a self-directed IRA, and it can be designated as a Roth or a deductible IRA. If you pay someone for goods or services in bitcoin, and the amount paid is worth over $600 USD at the time of the transaction, you are obligated to maintain a record of the transaction and use it for gains/losses reporting. If you buy and sell enough bitcoin, or you are mining bitcoin and making a profit, you may need to withhold self-employment taxes or at least include it in your gross income. This guidance applies to all cryptocurrencies that meet the IRS’s definition of a “convertible virtual currency.” You may also need to follow FinCEN guidance and register as a money transmitter on the federal and state level. For all bitcoin transactions that you report, the IRS and FinCEN require you to use the fair market value per the USD exchange rate on the date of the transaction. State sales taxes may also apply.
In some countries, you still won’t have to deal with taxes on cryptocurrencies, but in many countries, you will. Japan has been charging an 8% sales tax on bitcoin transactions but is reportedly going to exempt bitcoin and other cryptocurrencies in the near future. According to most sources, few Japanese citizens and businesses engage in bitcoin trading, but the government has been making Japan somewhat of a bitcoin safe haven, establishing regulations that are friendly to cryptocurrency markets.
In Germany, they do not have long-term capital gains taxes, but Germans may have to pay 25% income taxes depending on how the bitcoin is acquired. Some countries like South Africa have decided not to regulate bitcoin at this point, meaning you could potentially avoid taxes on all cryptocurrency gains and income. Please note that we do not presume to be your tax or legal advisers, and you should consult a professional in your jurisdiction before making any decisions. Software such as Bitcointaxes has been developed to help Bitcoiners calculate their taxes.
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