It is sticky to wonder how you would track all those small purchases online or at the local eatery accepting Bitcoin. The featured contributor on today's Coin Desk article checked with the IRS and received confirmation. Keith A. Aqui, who wrote the IRS Notice, did confirm that, ‘when you exchange property for other property, then you have to declare, because it’s a capital asset.’
If you are trading Bitcoin and hold it in cold storage for one year then you can apply the long term gain tax rule. It was confirmed again by the IRS representative that, ‘you’re not a dealer, if you’re a typical person, whether you call yourself an investor or not, that is essentially what you’re going to be under the tax code. So if I have 10 bitcoins sitting around and I use them in a transaction and I realize a gain from the transaction compared to the original price, I will pay tax on that gain, as a capital gain.’
To be realistic you may buy a couple of Bitcoin and keep in a cold storage at an exchange and then transfer to a hot wallet so that you make a purchase which could be online retail, a lunch at an eatery or a sport event. Now you have a couple of transactions against a Bitcoin that had a value of $500 at original purchase and you have spent $300 in purchases at Bitcoin close of $499. You have no worries with those transactions. If Bitcoin moves up to $525 and you utilize $300 of your original $500 cost basis you must calculate the percentage of Bitcoin spent for the cost basis on that original amount which would be $15. Keep track of the date for capital gains tax application so you know when you are in a long term capital tax position.
You can go to a website like the 1031 Gateway website and find a format for capital gain calculation and answers to questions.
How realistic is it that the IRS will audit you? What type of records will be reviewed on Bitcoin to determine correct taxation? You do not have wiggle room to fabricate or ignore an asset transaction. ‘Unless a specific exception applies, if you use any asset other than cash to make payments of any nature, you have taxable gain. The Notice doesn’t make this the law. It already is,’ states Bryan Smith of Perkins Coie’s tax practice.
What are the statistics on an IRS audit? In 2013 the overall audit rate was .96% and lowest since 2005. You can do some research and find out about the probability of receiving an audit. It is guided by income level and filing type. You can go to the tax debt help website for the charts of the income levels and the audit percentage for your tax bracket and business if you are an owner.
The IRS will audit higher income level people because there is more money to be gained as opposed to the small level of income tax, according to The Tax Debt Help website. So consult with your tax accountant or professional adviser. Do some research to maintain your accurate recordkeeping for your best possible position for tax reporting.
This question of ordinary income and capital gains tracking may motivate someone to develop an app for Bitcoin tracking. That is not a bad idea. An exchange would be wise to consider adding a benefit feature like that in their services.
To find more information about Bitcoin view the list below in Author’s suggestions and the video atop this article on the IRS ruling and check out their website IRS.gov.
Twitter: Victoria Wagner@victoriaross888