Between 2013 and 2015, fewer than 900 people a year reported Bitcoin transactions on their tax forms. The U.S. Government sees Bitcoin as property, not a currency. When you purchase an item with Bitcoin, you are technically selling property for a cash value and using the money from the sale to make the purchase. Everything that you buy with Bitcoin is supposed to be reported on your taxes.
Tax Rates for Bitcoin
A lot of people that own Bitcoin do not use the coins to make purchases; they, instead, approach Bitcoin as an investment. If you have held your digital assets for more than a year, they are taxed as capital gain. If you hold them less than a year and sell them, they are taxed as income. When Bitcoin is taxed as capital gain, the tax rate could be between 15-20%.
In 2016, the IRS filed a summons on all U.S. Coinbase users who transferred Bitcoin through the service–if the Bitcoin had a value of $20,000 or more in a given year. Coinbase fought the summons, but as of November of 2017, a San Francisco court has required Coinbase to report the ID numbers, names, addresses, date of birth, and transaction logs of 14,355 accounts. The results of the summons have not yet been made public.
Cryptocurrency Tax Fairness Act
There could be a silver lining in the future. Congress is deliberating on a “Cryptocurrency Tax Fairness Act,” sponsored by Arizonan Representative David Schweikert. If passed, the bill would create a tax exemption for cryptocurrency transactions under $600. Proponents of the bill argue that the exemption would encourage innovation instead of hampering it. Opponents of the bill maintain that the IRS rule gives clear guidelines to taxpayers, which will help them accurately report their taxes.