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Bitcoin Befuddlement: How to File Correctly

If you think the tax accounting of your dollars is tricky, try mastering the accounting services needed for bitcoins. Reporting individual tax, business tax or any other taxes on bitcoins can be tough, mostly because the IRS lacks guidelines explaining how to complete the filing process properly.

The government doesn’t recognize bitcoins—or any virtual currency—as legal tender, but instead treats this currency as property for tax purposes. The general tax principles for property transactions also apply to any bitcoin transaction.

A taxable transaction occurs each time you exchange a bitcoin. Therefore, taxpayers must recognize a gain or loss every time they use bitcoin; no de minimis exception exists. The taxpayer must continually track every bitcoin’s basis accurately, which many find highly demanding.

To further complicate the process, bitcoin’s value is very volatile. We recommend you secure each bitcoin purchase in a separate, online wallet and maintain careful records regarding the bitcoin’s established date and its original basis.

The character of gain or loss depends on whether bitcoin is a capital asset to the taxpayer. Owners may even fall under the Affordable Care Act regulations: bitcoin gain counts towards the unearned income Medicare contributions tax. If you’re a taxpayer with a modified adjusted gross income more than $200,000 ($250,000 if married filing jointly), expect an additional 3.8% tax on bitcoin gain.

Business owners beware: if you pay an independent contractor a U.S. dollar equivalent of $600 or more using bitcoin, you’re subject to the same 1099 regulations as if you paid in actual currency.

With a lack of clear and definitive bitcoin accounting guidelines from the IRS, you may need help reporting this currency. The tax accountant firm of Patrick & Robinson CPAs can help with this or any other tax compilation issues you may face. Contact us at or 904-396-5400.

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