The Most Comprehensive Tax Guide for Bitcoin Traders

The Most Comprehensive Tax Guide for Bitcoin Traders

Submitted by adil on Fri, 06/13/2014 - 19:06

Here's the Best Tax Guide for Bitcoin

The IRS Tax guidance released in March 2014 has profound effects on all virtual currencies. The most famous digital currency – Bitcoins will also face many problems as it will now be considered as a property instead of a currency. We are going to take the example of Brad Trader to analyze the effects of new IRS tax regulations.

Brad Trader is currently married to a beautiful and supporting wife. They have jointly earned an annual taxable income of $100,000 in the previous year. Now we will see how he will deal with filing his tax returns in view of the latest developments by IRS.

Effects on trading losses and profits:

If Brad is making good profits with trading Bitcoins, he will love the notion of IRS declaring Bitcoins as a property instead of a currency. He will be encouraged to trade on long term as there will be only 15% tax on long term gains and losses instead of the usual 25% income tax. That is a considerable difference in margin rates for Bitcoin miners and investors. Brad will not like to trade on short term as he may be charged the normal 25% tax rates on short term capital gains.

But the worst case scenario will be if Brad keeps trading short term on Bitcoins and experiences losses. He will find it difficult to place lost Bitcoin trades as nontaxable income due to their status as a property. There is an annual limit of $3,000 on the amount that can be declared as lost property expenses eligible for tax exemption. The only option Brad will have in that case is to carry the losses forward and trade more, hoping to average out the losses, which is usually not a good idea. He would have found it much easier to write off the losses as foreign currency deprivation, protecting himself from extra income tax returns.

The best move Brad can move right now is to talk to his tax advisor before moving forward with his trading business. Like Bitcoins, IRS will also deploy similar regulations for all other virtual currencies very soon. He may need to discuss many other issues such as legitimacy of international Bitcoin trading as some countries have declared Bitcoins illegal. There is no doubt everyone involved in Bitcoin trading will now have to take extra measures at bookkeeping and pay more attention to the details mentioned in the updated IRS regulations. IRS will be releasing more information giving detailed explanations on how everyone including Bitcoin merchants, miners and service providers will fit in the new tax system.

Brad Trader would also need to reconsider his trading strategy if he loved making some extra money through short term trading. Trading on a long term basis is a completely different dimension, and he will need to learn fast if he still wants to keep making profits by trading Bitcoins. It will take some time for IRS to formulate the best possible tax structure for the revolutionary peer-to-peer networking concept that is the basis of Bitcoin property.