How to Report Bitcoin on Your 2020 Taxes

January 15, 2021

With the new year comes a sense of new beginnings, looking to the future… and tax season. Maybe taxes aren't your favorite topic to discuss (I can assure you it is not my favorite topic to write about), but they are a necessary and essential part of being a working adult in the United States. Add bitcoin into the mix, and it might just be enough to consider going off the grid once and for all. But, have no fear; bitcoin and taxes aren't too complicated. I've put together some resources to help take the stress out of approaching bitcoin and other cryptocurrencies on your taxes.

To be clear, I will only be talking about U.S. federal taxes. On the state level, different jurisdictions treat crypto differently. And of course, you will need to consult with your own tax accountant. Hopefully, after you read this article, you will be better positioned to have a productive discussion with them.

For starters, let's talk about the way the IRS views bitcoin and other cryptocurrencies.

How the IRS Views Cryptocurrency

The IRS views bitcoin and other cryptocurrencies as property and refers to them as "virtual currencies." From the IRS website: "Virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency."

This means that any person or company in the United States that produces income from bitcoin, including miners, investors, and merchants, must report that income to the IRS and pay the required tax.

So, if you have received any portion of bitcoin or cryptocurrency from mining, that value is immediately taxable. There is no need to sell the currency to create a tax liability.

If you used bitcoin by cashing it out for U.S. dollars or purchasing goods and services, you would owe taxes if the value you sold it for is greater than the price you acquired the bitcoin. If you have made any money on bitcoin, you will have to report it on your taxes.

Many people may think they don't have to report the money they make from things that they sell, but this is not true. If you have made any U.S. dollar gains from bitcoin, then there is a tax liability.

Do I have to report Bitcoin on my federal tax return?

You do have to report Bitcoin on your federal tax return. This year the IRS has updated the 1040 tax return form to ask taxpayers directly on-page whether they have ever received, sold, sent, exchanged, or otherwise acquired any cryptocurrency. So, anyone who makes income from cryptocurrency must report that income and pay the required tax.

You must report your cryptocurrency transactions in U.S. dollars. This means you will have to convert your crypto value to dollars when you buy, sell, mine, or use it.

For 2020, the IRS has updated its instructions for disclosing crypto activities. The first question on Form 1040 asks about cryptocurrency. It says: "At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?" Taxpayers only need to answer "yes" or "no" to this question.

The IRS update adds, "This language was not present in the prior instructional guidance that was released in October. The IRS will now know everyone who purchased cryptocurrency in 2020 as all taxpayers must answer this question under penalty of perjury."

To be clear, you must answer "yes" to the IRS' cryptocurrency question in 2020 if you have purchased or received any cryptocurrency. Additionally, you must reply "yes" if you sold any cryptocurrency for a fiat currency or exchanged a cryptocurrency for another cryptocurrency. You also need to answer yes if you used cryptocurrency to pay for goods or services.

Keep track of your balance

To make sure you are ready for tax season, always keep a careful record of your cryptocurrency activity. Always keep track of the market value of your bitcoin when it was mined or purchased, as well as a log of its market value when you used it or sold it. This information will help you keep track of where you stand with bitcoin on your taxes.

If you buy and sell stocks, you likely will receive a Form 1099-B from your broker that shows you the cost basis of your transactions. With bitcoin and other cryptos, it is not likely you will be sent this form. One of the downsides of being your own bank is being totally responsible for your tax liabilities.

However, if you've used a cryptocurrency exchange to make payments of more than $20,000 or make more than 200 transactions, you may get a Form 1099-K from the exchange. You should include the amounts shown on the 1099-K when calculating your income tax return.

New FinCEN Requirements

The Financial Crimes Enforcement Network (FinCEN) has announced its plans to change the Report of Foreign Bank and Financial Accounts' requirements, known as the FBAR, to include cryptocurrencies. Typically, individuals must report any financial interests outside of the country that exceeds $10,000. Before, digital currencies were not required to be reported in an FBAR. Now FinCEN will be changing the laws to include the reporting of digital assets like bitcoin. While these updates haven't been fully released yet, it is something to keep in mind while preparing your taxes for 2020.

Tools to help you

Fortunately, there are tools out there to help you work out your cryptocurrency-related capital gains and losses.

Bitcoin.Tax - This website helps you calculate your crypto gains and losses for tax purposes. Simply upload or add your transactions from the exchanges and wallets you have used, along with any crypto you might own. They will do the calculations for you.
CryptoTrader.Tax - Another website that allows you to connect your exchanges and import your transactions to provide you with tax reporting documents.
Zenledger.io - ZenLedger helps you track your transactions, see your capital gains, and provides you with tax forms and financial reports based on your transactions.
And of course, your accountant - Your accountant should be able to clear up any crypto concerns you may have this tax season.

While tax requirements aren’t the most exciting part of bitcoin, fulfilling your requirement to report on bitcoin gains and losses is important. The good news is that you can deduct capital losses on bitcoin, just as you would with stocks and bonds. If you have losses on bitcoin or other cryptocurrencies, declare them on your tax return and maybe then you can reduce your tax liability.

Remember, an accountant will be much better suited to answer any questions you may have surrounding cryptocurrency this tax season. But, this article should help to prime you for that conversation.

1 This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.