Will a 1099-B form work best for reporting bitcoin purchases and sales?

Answer

How to report bitcoin transactions depends on how they are classified.  

Here is some TurboTax guidance to help you decide where to report transactions:

It depends on how those currencies were held and used. Based on that, the IRS determines whether to treat the currency as income or property.

Bitcoin used to pay for goods and services is taxed as income:

  • Self-employed individuals with Bitcoin gains or losses from sales transactions must convert the currency to dollars as of the date it was received for goods or services, and report the figures on their tax returns.
  • If you were not given a 1099-MISC for your Bitcoin, here are the steps to follow in TurboTax.
  • Employees must report their total W-2 wages in dollars, even if earned as Bitcoin.
  • If you are an employer paying with Bitcoin, you must report employee earnings to the IRS on W-2 forms.
    • You must convert the Bitcoin value to U.S. dollars as of the date each payment is made and keep careful records.
    • Wages paid in Bitcoin are subject to withholding to the same extent as dollar wages.

Bitcoin held as capital assets is taxed as property:

If you hold Bitcoin as a capital asset, you must treat it as property for tax purposes. General tax principles applicable to property transactions apply. In other words, just like stocks or bonds, any gain or loss from the sale or exchange of the asset is taxed as a capital gain or loss. Otherwise, the investor realizes ordinary gain or loss on an exchange.

Bitcoin received as income—and then held and sold for profit—is taxed as both:

  • If you were paid in Bitcoin, you first pay taxes on the employment income.
  • If you later sell the Bitcoin for a profit, you then pay the capital gains tax.

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Yes. The IRS is taking cryptocurrency very seriously, to the extent that they took the digital currency exchange Coinbase to court to obtain user records and now have a contract with digital forensics company Chainalysis to help track cryptocurrency transactions.

  • If you were paid in Bitcoin or other digital currency, you should report your earnings as income.
  • If you hold Bitcoins or other digital currencies as a capital asset, you must treat them as property for tax purposes. If you sold them for profit, you must report earnings regardless of whether you received a 1099-B.

Note: Many people have been unsure of how to treat Bitcoin, so you may have recorded earnings incorrectly on prior returns. If you need to amend a previous return, follow these steps. (We also have a video that shows you how.)


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