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The bitcoin craze appears to have died down and its price has plummeted since peaking at nearly $19,000 per coin in December 2017.
But whether U.S. investors made or lost money during or after the craze, many don’t realize that selling bitcoin could be a taxable event, a new Credit Karma survey shows.
That could be a mistake. Underreporting income could lead to an audit and having to pay penalties and interest. Meanwhile, taxpayers who don’t report losses may be missing out on valuable deductions — which is unfortunate since U.S. investors who have sold their bitcoin collectively lost approximately $1.7 billion, at an average of $718 per person, according to our survey. (Learn about our methodology.)
Key survey findings
|Collectively, U.S. investors who have sold their bitcoin incurred realized losses of approximately $1.7 billion. As for those who haven’t sold yet, their unrealized losses total an approximate $5.7 billion.|
|Only 53% of American bitcoin investors plan to report their bitcoin gains or losses on their taxes, while 19% haven’t made up their mind yet. Separately, more than a third (35%) of investors who sold at a loss don’t plan to report.|
|Investors who made money off bitcoin were more likely to report their gains than investors who lost money are to report their losses (59% versus 38%).|
|More than half (58%) of all bitcoin investors were not aware they could claim a tax deduction for their realized bitcoin losses.|
|Of U.S. bitcoin investors who don’t plan on reporting, 35% falsely believe they aren’t required to report their bitcoin investment gains or losses.|
|Of those who don’t plan on reporting, 57% of bitcoin investors think they didn’t gain or lose enough money to have to report.|
How is bitcoin taxed?
The IRS considers bitcoin a convertible virtual currency (i.e., it can be exchanged for or used instead of a real currency, such as the U.S. dollars), but for tax purposes, the IRS treats cryptocurrencies as property. That means the sale or exchange of bitcoin could be reportable on your income tax returns the same way property would be.
In short, if you hold bitcoin as a capital asset then profits from a bitcoin sale could be taxed as capital gains, while losses may count as capital losses.
If you held your bitcoin for one year or less before selling, then your gains or losses may be taxed at your ordinary income tax rate. If you held it for more than a year, then the gains may be taxed at the capital gains rate — which could be lower than your ordinary income tax rate.
Taxpayers may not realize there are different tax rates and rules for investments, and they might not think of bitcoin as an investment at all.
For example, of the respondents from our survey who sold some or all of their bitcoin but didn’t plan on reporting the sale, 35% incorrectly believed they aren’t required to report the sale.
But investors should report profits or losses from cryptocurrency sales and they should include the value of any cryptocurrencies they mined in their gross income for the year. And they should do it not only because the IRS requires it, but because you can claim your bitcoin losses as a tax deduction in some circumstances.
Many bitcoin investors don’t plan to report their gains or losses — even if they lost money
When asked whether they planned to report their bitcoin losses or gains during the upcoming tax season, only 53% of U.S. bitcoin investors from our survey said they would. While more than a third (35%) of bitcoin investors with realized losses said they planned on reporting.
At an average loss of about $718 per person, this could be a mistake, as investors can claim capital losses as a tax deduction. These losses could offset whatever gains investors experienced during the year (up to $3,000), potentially giving them a significant tax break.
So why don’t bitcoin investors plan to report?
Among respondents who sold some or all of their investment and didn’t plan to report their gains or losses this year …
- Most (55%) didn’t think they had to report their bitcoin gains or losses because of how little they gained or lost.
- An additional 35% said they didn’t believe they had a requirement to report gains or losses.
- Nearly a quarter, 22%, said they don’t know how to report gains or losses.
- The remaining 5% marked other and wrote in answers, such as that they’d sold their bitcoin years ago.
Investors who learned they could deduct capital losses were more likely to say they would report — even if they made money
Even though those who sold their bitcoin at a loss can typically claim a tax deduction, we found that before taking our survey, 61% of respondents who lost money on bitcoin didn’t actually realize they could get a tax deduction for bitcoin losses.
But, somewhat surprisingly, learning about the deductibility of capital losses from the survey spurred both investors with realized gains and losses to say they would be more likely to report their bitcoin investments this tax season. Of survey respondents, 58% with realized losses — and 53% with realized gains — said they’re more likely to report their investment activity now that they know the rules.
More education could help investors accurately file their tax returns
At the end of the day, the majority of bitcoin investors (53%) do plan to report their gains or losses. So it may not be fair to conclude those who don’t are intentionally trying to avoid paying taxes. Some education may be all that’s needed to remedy the situation.
Informing bitcoin investors that they have an obligation to report gains — no matter how small — on their federal income taxes and showing them how to do so could help keep taxpayers out of trouble. After all, underreporting capital gains, including cryptocurrency gains, could result in penalties, interest or even criminal prosecution.
Additionally, helping investors who lost money understand that they may be able to deduct their losses could be welcome news to many.
Tips for reporting bitcoin gains and losses
Taxpayers accustomed to receiving tax forms from employers, banks and brokerages might be surprised to learn they won’t necessarily receive a form with information about their bitcoin trading. In many cases, it’s up to taxpayers themselves to determine how and when to report trading activity on their tax return.
Keep these tips in mind.
- The IRS issued guidance on cryptocurrencies in 2014. The document has a Q&A section that taxpayers may find informative.
- You can report each bitcoin transaction using Form(s) 8949 and summarize your capital gains or losses on Schedule D.
- Your capital gains or losses can depend on the difference in price (in U.S. dollars) between when you bought the bitcoin (its cost basis) and when you sold it.
- If you paid a fee for buying bitcoin, you might be able to include that fee in the bitcoin’s cost basis, which could lower your tax liability.
- If you bought or sold bitcoin through an exchange, you may be able to download your account history and use the information to help gather information to prepare your tax return.
- Depending on how you held and received the bitcoin, the tax treatment can differ and it can get complicated. We recommend looking for online services that can help you track your account information to help prepare your return or reaching out to a tax professional.
On behalf of Credit Karma, Qualtrics conducted an online survey in November 2018 of 1,009 American bitcoin investors age 18 and older to learn about their bitcoin investments and their plans to report their realized gains or losses to the IRS during the upcoming tax season. To arrive at the aggregate amount lost in bitcoin sales, we first calculated the total number of American adults who sold their bitcoin investments by multiplying the total number of U.S. adults (based on 2017 Census Bureau population data) by the percent of the U.S. adult population who has invested in bitcoin (about 6.5%, by Qualtrics’ estimation). We then multiplied that total subset of the population by the average realized amount lost per person (based on our survey results). We used the same methodology to arrive at the collective unrealized losses by multiplying the total number of U.S. adult bitcoin investors by the average unrealized amount lost per person (based on survey results). All numbers are current as of the time of the survey and all percentages and figures have been rounded to the nearest whole.