Bitcoin Mining As A Business
There are a few more specific areas that should be understood and might be relevant when filing taxes.
Capital Losses Selling or spending Bitcoins at a lower price than you acquired them is a capital loss. When you make a profit, a capital gain, you have to pay taxes on that difference.
But when you make a loss you can reduce your overall taxes. This is done in two ways. First, any losses made during the year can be used to reduce any other gains you may have made.
Calculating capital gains and taxes for Bitcoin and other crypto-currencies
For example, you may have gains from the stock market that are also included in Schedule D of your Adding your gains and losses will reduce your total gains and so reduce the amount of taxes you will pay. You need to be aware that first, you combine your long-term gains and losses, then short-term gains and losses, and finally arrive at your net gain or loss. Any remaining losses can be carried forward into future years.
Wash Sales At the tax end year, you might think to sell stocks that have fallen in price, buy them back, just to create a loss and report it in your taxes. You’ll have capital losses, pay less taxes and could buy those stocks back again at a very similar price.
This is known as tax-loss selling and the IRS prevents it by their wash sale rule. A sale is deemed to be a wash if you buy the same, or similar, stock or security within 30 days before or after a loss sale. If a sale is a wash, then you cannot claim those losses but instead they are transferred to the cost basis of the related purchase.
The tax code defines wash sales as only applying to stocks and securities, which Bitcoin is neither: A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale [ IRS p17 ] That’s not to say they should be allowed, but since Bitcoins are property they do not fall under this rule.
Economic Substance However, there is more to it than this, something called the “economic substance doctrine”. This says that a transaction must have economic substance apart from just tax effects. Clearly selling and immediately re-buying the same coin at the same price has no economic substance other than generating a tax loss, and so those losses could be deemed invalid. To avoid this you would have to do something that does have economic substance, such as buying different assets or waiting enough time that you are exposed to risk.
How long should you wait? As noted by tax attorney Tyson Cross, there is no clear answer but it is days and possibly up to a week. Spending Something still unknown to many users is that spending and selling Bitcoins are treated the same for tax purposes.