1. How do I report cryptocurrencies?
While government regulation surrounding bitcoin and other cryptocurrencies is still in flux, it’s clear that users hoping to use crypto to skirt regulations entirely are no longer able to operate in the shadows. A November decision by a federal district court in California forced popular crypto-trading site Coinbase to disclose the information of over 14,000 users so their transactions could be taxed (Coinbase, Inc., No. 17-cv-01431-JSC (N.D. Cal. 11/28/17)).
As of today, the IRS treats cryptocurrencies as property rather than currency for federal tax purposes (Notice 2014-21). Holdings are not taxed, but gains and losses are. When a trader who holds a cryptocurrency as a capital asset sells that cryptocurrency, the rule is that if it was held for less than a year it is treated as short-term capital gain and taxed at an ordinary income rate. If it was held for more than a year, it is taxed at long-term capital gains rates. If it wasn’t held as a capital asset, the taxpayer will recognize ordinary gain or loss on the sale.