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Sold bitcoin last year? Here's how to do your taxes

Sold bitcoin last year? Here's how to do your taxes
A man prepares his coffee next to a bitcoin ATM at a San Diego coffee shop. (Eduardo Contreras / San Diego Union-Tribune)

If you invested in bitcoin last year, as many people did, the start of 2018 has been rough as the digital currency’s price dropped and wobbled. But that’s not the only headache.

It is now tax time, and federal rules for reporting earnings or losses can be tricky. When it comes to cryptocurrency, it is up to the investor to track down exactly what happened. In the case of bitcoin, that even means reporting when you used the digital currency to buy a coffee.

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Why do it: It’s against the law not to include cryptocurrency on taxes in the United States. Conventional wisdom among some bitcoin owners is that it is difficult for the Internal Revenue Service to find out if you own bitcoin, litecoin or any other digital currency if you traded less than $20,000. But Tyson Cross, a tax attorney who started studying bitcoin in 2013, said trying to hide it might not be worthwhile. If any crypto purchases were tied to a bank account, that will make it especially easy to find, he said.

“If you fail to report gains, that could be tax fraud,” Cross said. “You are taking a chance the IRS won’t catch you. Personally, I don’t think it’s worth it.”

First step: If you sold bitcoin at any time last year, you need to file Form 8949 to report capital gains. The first step is to get a record of your bitcoin transactions. Such a record from Coinbase, the most popular U.S.-based exchange, lists how much the user paid for the bitcoin, additional fees incurred, date purchased and what the cost of bitcoin was during the transaction. Coinbase offers an option to download transactions into an Excel spreadsheet, but it can be buggy. Most other exchanges should provide a record of transaction — sometimes to the exact second it happened — but it’s not guaranteed.

Second step: There are two websites that help calculate gains — bitcoin.tax and cointracking.info — that are recommended by accountants.

On cointracking.info, the user is asked to enter all the bitcoin purchases and sales individually.

On bitcoin.tax, the user can import directly from Coinbase with a click of a button, but it is important to review information after it comes over to make sure it matches what you see on Coinbase. After that, the user needs to enter any coins or fractions of coins they bought before that calendar year. For instance, if you bought bitcoin in 2016 and sold in 2017 when the market got hot, you would need to enter that 2016 purchase to figure out capital gains.

Last steps: The next thing to do is export the data once capital gains are calculated. Exporting costs $29.95 on bitcoin.tax. Then, the users can get a Form 8949 to turn in themselves or a file to upload directly to TurboTax.

When to contact a tax expert: Most “corner tax experts” will not have expertise in dealing with digital currency, Cross said. “If [tax filers] are having trouble [with bitcoin software] and need help calculating capital gains,” he said, “they want to reach out to a tax professional experienced with cryptocurrency.”

Accountant Vincenzo Villamena, a New York-based expert in digital currency, also recommends using software — mostly bitcoin.tax because it is more user friendly — because it is the first step in bookkeeping. The biggest problem Villamena said he encounters from clients is they don’t have a record of transactions.

After that, it’s just a matter of making sure it all looks right. “It’s up to the client to produce the right books,” he said. “It’s up to the accountant to do the spot checking, make sure things make sense and look over everything.”

The fine details: Every time digital currency is used, the IRS considers that a taxable event, so it’s not just converting your bitcoin to dollars. Taxable events include using bitcoin to pay for a sandwich or exchanging litecoin for ethereum. “It’s burdensome and difficult to track those transactions,” Cross said. “While [bitcoin software] makes it easier, it’s still your burden as a cryptocurrency holder and investor to keep accurate records.”

Possible questions: If you bought fractions of several bitcoins (as most amateur investors do) and then sold some bitcoin, you might be worried you did not accurately report what bitcoin you sold. But a software user probably did everything correctly because bitcoin.tax uses the accounting method — first in, first out — recommended by accounts as a default.

Disclosure: The writer of this article bought $130.12 in bitcoin in 2014. He sold more than half in 2017.

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