Bitcoin and altcoins are a bold new financial frontier. And they’re one that’s explored by both legitimate investors—and, well, ones that are less so.
One of the big questions, or rather preferred belief, among some altcoin investors is that their altcoins are not a taxable asset. Sorry, though: They are, at least if you want to do anything with them beyond trade them with other altcoin owners.
Are Bitcoins Taxable?
While the definition of a taxable asset depends on the law of the country where you live, as a rule, altcoins are seen like art, collectibles sitting in a vault, or other forms of potential, non-currency wealth. As long as it hangs on the wall or sits in the vault, Uncle Sam quite honestly could not care less. It’s just an object.
The same is true of the coins in your digital wallet right up until the moment you sell them for real currency or trade them for something of value, and that’s when tax law kicks in. Say, for example, you buy some t-shirts entirely in bitcoin. You would owe the same taxes on that transaction that you would if you bought them in dollars, and the merchant who sold you the shirts also owes the taxes the government would normally collect on his sales, as well. In fact, recently the US loophole that allowed exchanges to trade one altcoin for another, IRC Section 1031 (a)(1), was closed; now it only applies to real estate, so if you turn your bitcoin into litecoin, technically you owe Uncle Sam a piece of the transaction.
This is not to say, mind you, that once tax time rolls around, you’ll be expected to turn all your altcoins into actual currency and pay taxes on them. If you’ve only acquired altcoins using actual currency, or only stuck to one network buying altcoins and have made no purchases or exchanges for goods and services with them, then there’s no tax issue. But anything else? You’re on the hook. And unfortunately, many exchanges and altcoin businesses are not with the program.
How To Pay Your Bitcoin Tax?
In theory, when you use an altcoin exchange and get real currency out of the deal, at the end of the US fiscal year that exchange should issue you a 1099 form, which is the catch-all for income that’s not taxed at the point of exchange. In practice, these forms are rarely issued, so it’ll be up to you to go back, track all your income from sales, and make sure you’re paying your fair share.
Some of the more libertarian sectors of the altcoin market will try to argue nobody can find you—but don’t kid yourself. The blockchain means there’s literally a public record anybody can look at to find your transactions, and law enforcement is already taking notice. Tax evasion is not a smart investment move on any level, so if you’re investing in altcoins, keep careful track of the money you make, and be sure to report it properly.