With the explosion in popularity of cryptocurrency (i.e. Bitcoin, Ethereum, Litecoin, Ripple, etc.) in 2017, you are sure to have clients who have invested in it and (likely) profited off it as well. But as tax season approaches, do you know how to file taxes on behalf of those clients and their cryptocurrency (also known as virtual currency) investments?
Essentially, they’re taxed as property if they’re held as a capital asset. But you’ll need more info from your client:
- Date purchased
- Purchase price
- Date sold
- Sale price
The dates provided will help you determine whether the sale qualifies as a long-term gain or short-term gain. Short-term gains are to be taxed equal to their federal income tax bracket percentage. Long-term gains from cryptocurrencies follow a different tax bracket:
- Individuals in the 10% and 15% income tax bracket pay 0% on cryptocurrencies
- Individuals in the 25%, 28%, 33% and 35% income tax bracket pay 15% on cryptocurrencies
- Individuals in the 39.6% income tax bracket pay 20% on cryptocurrencies
Your client’s gains on the sale of cryptocurrency is also subject to the 3.8% tax on net investment income if their adjusted gross income is above $200,000 ($250,000 for married filing jointly).
In a nutshell, although cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) are viewed as being globally anonymous, not reporting gains or losses could be viewed as tax evasion by the IRS.