Bitcoin continues to soar and has reached an all-time high this year. For some investors, the post-election gains may be just what they were waiting for to sell, lock in their gains, and walk away.
The IRS treats Bitcoin (and other digital currencies) like any other asset. Therefore, if bitcoin is sold at a gain the gain will be taxed at either short-term or long-term Capital Gains rates depending on whether the bitcoin was held for longer than a year or not. While digital currencies may not have the same tax reporting documents produced each year, it is important to know that they MUST be reported whether a tax form was received or not.
In fact, the IRS is increasing the enforcement on digital currencies to make sure that this income is reported properly on personal tax returns. In addition to reporting any transactions, owners of digital currencies must also check a box on their individual tax return indicating they “received, sold, exchanged, or otherwise disposed of a digital asset” for the year. If this box is not checked and the Bitcoin gains are not reported it may show that the taxpayer was “willfully” attempting to defraud the US government. This is the standard used to determine tax evasion, which is not only punishable by penalties and interest, but jail time as well.