<prompt> Human: STATUS: Majority of questions have been answered. If yours got missed, please feel free to post it again.IntroductionAll,Based on the rapid increase in popularity and price of bitcoin and other crypto currencies particularly over the past year, I expect that lots of people have questions about how crypto currency will impact their taxes. This thread attempts to address several common issues. Im posting similar versions of it here, in several major crypto subs, and eventually in the weekly tax help threads rpersonalfinance runs.Id like to thank the rpersonalfinance mod team and the rtax community for their help with this thread and especially for reading earlier versions and offering several valuable suggestionscorrections.This thread is NOT an endorsement of crypto currency as an investing strategy. There is a time and a place to debate the appropriateness of crypto as part of a diversified portfolio - but that time is not now and that place is not here. If you are interested in the general consensus of this sub on investing, I would urge you to consult the wiki while keeping in mind the general flowchart outlining basic steps to get your finances in order.Finally, please note that this thread attempts to provide information about your tax obligations as defined by United States law and interpreted by the IRS under the direction of the Treasury Department. I understand that a certain portion of the crypto community tends to view crypto as tax free due to the actual and perceived difficulty for the IRS to know about the transactions involved. I will not discuss unlawfully concealing crypto gains here nor will I suggest illegal tax avoidance activities.___The BasicsThis section is best for people that dont understand much about taxes. It covers some very basic tax principles. It also assumes that all you did during the year was buysell a single crypto currency.Fundamentally, the IRS treats crypto not as money, but as an asset investment. While there are a few specific twists when it comes to crypto, when in doubt replace the word crypto with the word stock and you will get a pretty good idea how you should report and pay tax on crypto.The first thing you should know is that the majority of this discussion applies to the taxes you are currently working on 2017 taxes. The tax bill that just passed applies to 2018 taxes with a few very tiny exceptions, which most people will file in early 2019. In general, you dont have to report or pay taxes on crypto currency holdings until you cash out all or part of your holdings. For now, Im going to assume that you cash out by selling them for USD; however, other forms of cashing out will be covered later.When you sell crypto, you report the difference between your basis purchase price and proceeds sale price on Schedule D. Your purchase price is commonly referred to as your basis; while the two terms dont mean exactly the same thing, they are pretty close to one another in particular, there are three two ways to calculate your basis - your average cost, a first-in, first-out method, and a specific identification method. See more about these here and here EDIT - you may not use average cost method with crypto - see here If you sell at a gain, this gain increases your tax liability; if you sell at a loss, this loss decreases your tax liability in most cases. If you sell multiple times during the year, you report each transaction separately bad news if you trade often but get to lump all your gainslosses together when determining how the trades impact your income.One important thing to remember is that there are two different types of gainslosses from investments - short term gains if you held an asset for one year or less and long term gains over one year; i.e. one year and one day. Short term gains are taxed at your marginal income rate basically, just like if you had earned that money at a job while long term gains are taxed at lower rates.For most people, long term capital gains are taxed at 15. However, if you are in the 10 or 15 tax bracket, congrats - your gains up to the maximum amount of unused space in your bracket are tax free! If you are in the 25, 28, 33, or 35 bracket, long term gains are taxed at 15. If you are in the 39.6 bracket, long term gains are taxed at 20. Additionally, there is an extra 3.8 tax that applies to gains for those above 200,000250,000 singlemarried. The exact computation of this tax is a little complicated, but if you are close to the 200,000 level, just know that it exists.Finally, you should know that Im assuming that you should treat your crypto gainslosses as investment gainslosses. Im sure some people will try and argue that they are really day traders of crypto and trade as a full time job. While this is possible, the vast majority of people dont qualify for this status and you should really think several times before deciding you want to try that approach on the IRS.___Cashing Out - Trading Crypto for GoodsServicesI realize that not everyone that cashes out of crypto does so by selling it for USD. In fact, I understand that some in the crypto community view the necessity of cashing out itself as a type of myth In this section, I discuss what happens if you trade your crypto for basically anything that isnt cash minor sidenote - see next section for a special discussion on trading crypto for crypto; i.e. buying altcoins with crypto.The IRS views trading crypto for something of value as a type of bartering that must be included in income. From the IRSs perspective, it doesnt matter if you sold crypto for cash and bought a car with that cash or if you just traded crypto directly for the car - in both cases, the IRS views you as having sold your crypto. This approach isnt unique to crypto - it works the same way if you trade stock for something.This means that if you do trade your crypto for stuff, you have to report every exchange as a sale of your crypto and calculate the gainloss on that sale, just as if you had sold the crypto for cash.Finally, there is one important exception to this rule. If you give your crypto away to charity one recognized by the IRS; like a 501c3 organization, the IRS doesnt make you reportpay any capital gains on the transaction. Additionally, you still get to deduct the value of your donation on the date it was made. Now, from a selfish point of view, you will always end up with more money if you sell the crypto, pay the tax, and keep the rest. But, if you are going to make a donation anyway, especially a large one, giving crypto where you have a big unrealizeduntaxed gain is a very efficient way of doing so.___Alt Coins - Buying Crypto with CryptoThe previous section discusses what happens when you trade crypto for stuff. However, one thing that surprises many people is that trading crypto for crypto is also a taxable event, just like trading crypto for a car. Whether you agree with this position or not, it makes a lot of sense once you realize that the IRS doesnt view crypto as money, but instead as an asset. So to the IRS, trading bitcoin for ripple isnt like trading dollars for euros, but it is instead like trading shares of Apple stock for shares of Tesla stock.Practically, what this means is that if you trade one crypto for another crypto say BTC for XRP just to illustrate the point, the IRS views you as doing the following: Selling for cash the amount of BTC you actually traded for XRP. Owing capital gainslosses on the BTC based on its selling price the fair market value at the moment of the exchange and your purchase price basis. Buying a new investment XRP with a cost basis equal to the amount the BTC was worth when you exchanged them.This means that if you time your trade wrong and the value of XRP goes down after you make the exchange, you still owe tax on your BTC gain even though you subsequently lost money. The one good piece of news in this is that whenif you sell your XRP or change it back to BTC, you will get a capital loss for the value that XRP dropped.There is one final point worth discussing in this section - the so called like kind exchange rules aka section 1031 exchange. At a high level, these rules say that you can swap property with someone else without having to pay taxes on the exchange as long as you get property in return that is like kind. Typically, these rules are used in real estate transactions. However, they can also apply to other types of transactions as well.While the idea is simple and makes it sound like crypto for crypto should qualify, the exact rulesdetails of this exception are very fact specific. Most experts including myself, but certainly not calling myself an expert believe that a crypto for crypto swap is not a like kind exchange. The recently passed tax bill also explicitly clarifies this issue - starting in 2018, only real estate qualifies for like kind exchange treatment. So, basically, the vast majority of evidence suggests that you cant use this loophole for 2017; however, there is a small minority viewsome small amount of belief that this treatment would work for 2017 taxes and it is worth noting that Im unaware of any court cases directly testing this approach.___Dealing with ForksPerhaps another unpleasant surprise for crypto holders is that forks to create a new crypto also very likely generate a taxable event. The IRS has long since at least the 1960s held that found money is a taxable event. This approach has been litigated in court and courts have consistently upheld this position; it even has its own cool nerdy tax name - the treasure trove doctrine.Practically, what this means is that if you owned BTC and it forked to create BCH, then the fair market value of the BCH you received is considered a treasure trove that must be reported as income ordinary income - no capital gain rates. This is true whether or not you sold your BCH; if you got BCH from a fork, that is a taxable event note - Ill continue using BTC forking to BCH in this section as an example, but the logic applies to all forks.While everything Ive discussed up to this point is pretty clearly established tax law, forks are really where things get messy with taxes. Thus, the remainder of this section contains more speculation than elsewhere in this post - the truth is that while the idea is simple fork free money taxable, the details are messy and other kinds of tax treatment might apply to forks.One basic practical problem with forks is that the new currency doesnt necessarily start trading immediately. Thus, you may have received BCH before there was a clear price or market for it. Basically, you owe tax on the value of BCH when you received it, but it isnt completely clear what that value was. There are several ways you can handle this; Ill list them in order from most accurate to least accurate but note that this is just my personal view and there is ongoing disagreement on this issue with littleno authoritative guidance. Use a futures market to determine the value of the BCH - if reliable sources published realistic estimates of what BCH will trade for in the future once trading begins, use this estimate as the value of your BCH. Proscons - futures markets are, in theory, pretty accurate. However, if they are volatilesubject to manipulation, they may provide an incorrect estimate of the true value of BCH. It would suck to use the first futures value published only to have that value plummet shortly thereafter, leaving you to pay ordinary income tax but only have an unrealized capital loss. Wait until an exchange starts trading BCH; use the actual spot price as the value. Proscons - spot prices certainly reflect what you could have sold BCH for; however, it is possible that the true value of the coin was higherlower when you received it as compared to when it started trading on the exchange. Thus this method seems less accurate to me than a futures based approach, but it is still certainly fairly reasonable. Assume that the value is 0. This is my least preferred option, but there is still a case to be made for it. If you receive something that you didnt want, cant access, cant sell, and might fail, does it have any value? I believe the answer is yes maybe not value it perfectly, but value it somewhat accurately, but if you honestly think the answer is no, then the correct tax answer would be to report 0 in income from the fork. The IRS would be most likely to disagree with this approach, especially since it results in the least amount of income reported for the current year and the most favorable rates going forward. Accordingly, if you go this route, make extra sure you understand what it entails.Note, once youve decided what to report as taxable income, this amount also becomes your cost basis in the new crypto BCH. Thus, when you ultimately sell your BCH or trade it for something else as described above, you calculate your gainloss based on what you included in taxable income from the fork.Finally, there is one more approach to dealing with forks worth mentioning. A fork feels a lot like a dividend - because you held BTC, you get BCH. In a stock world, if I get a cash dividend because I own the stock, that money is not treated as a treasure trove and subject to ordinary income rates - in most cases, it is a qualified dividend and subject to capital gain rates; in some cases, some types of stock dividends are completely non taxable. This article discusses this idea in slightly more detail and generally concludes that forks should not be treated as a dividend. Still, I would note that Im unaware of any court cases directly testing this theory.Ultimately, this post is supposed to be practical, so let me make sure to leave you with two key thoughts about the taxation of forks. First, I believe that the majority of evidence suggests that forks should be treated as a treasure trove and reported as ordinary income based on their value at creation and that this is certainly the safest option. Second, out of everything discussed in this post, I also believe that the correct taxation of forks is the murkiest and most up for debate area. If you are interested in a more detailed discussion of forks, see this thread for a previous version of this post discussing it at even more length and the comments for a discussion of this with the rtax community.___Mining CryptoSuccessfully mining crypto coins is a taxable event. Depending on the amount of effort you put into mining, it is either considered a hobby or a self-employment business activity. The IRS provides the following list of questions to help decide the correct classification: The manner in which the taxpayer carries on the activity. The expertise of the taxpayer or his advisors. The time and effort expended by the taxpayer in carrying on the activity. Expectation that assets used in activity may appreciate in value. The success of the taxpayer in carrying on other similar or dissimilar activities. The taxpayers history of income or losses with respect to the activity. The amount of occasional profits, if any, which are earned.If this still sounds complicated, thats because the distinction is subject to some amount of interpretation. As a rule of thumb, randomly mining crypto on an old computer is probably a hobby; mining full time on a custom rig is probably a business.In either event, you must include in income the fair market value of any coins you successfully mine. These are ordinary income and your basis in these coins is their fair market value on the date they were mined. If your mining is a hobby, they go on line 21 other income and any expenses directly associated with mining go on schedule A miscellaneous subject to 2 of AGI limitation. If your mining is a business, income and expenses go on schedule C.Both approaches have pros and cons - hobby income isnt subject to the 15.3 self-employment tax, only normal income tax, but you get fewer deductions against your income and the deductions you get are less valuable. Business income has more deductions available, but you have to pay payroll self-employment tax of about 15.3 in addition to normal income tax.___What if I didnt keep good records? Do I really have to report every transaction?One nice thing about the IRS treating crypto as an asset is that we can look at how the IRS treats people that day trade stock and often dont keep great recordshave lots of transactions. While you need to be as accurate as possible, it is ok to estimate a little bit if you dont have exact records especially concerning your cost basis. You need to put in some effort research historical prices, etc... and be reasonable, but the IRS would much rather you do a little bit of reasonable estimation as opposed to just not reporting anything. Sure, they might decide to audit youdisagree with some specifics, but you earn yourself a lot of credit if you can show that you honestly did the best you reasonably could and are making efforts to improve going forward.However, concerning reporting every transaction - yes, sorry, it is clear that you have to do this, even if you made hundreds or thousands of them. Stock traders have had to go through this for many decades, and there is absolutely no reason to believe that the IRS would accept anything less from the crypto community. If you have the records or have any reasonable way of obtaining recordsestimating them, you must report every transaction.___What if I dont trust you?Well, first let me say that I cant believe you made it all the way down here to this section. Thanks for giving me an honest hearing. I would strongly encourage you to go read other well-written, honest guides. Ill link to some I like both more technical IRS type guides and more crypto community driven guides. While a certain portion of the crypto community seems to view one of the benefits of crypto as avoiding all government regulation including taxes, Ive been pleasantly surprised to find that many crypto forums contain well reasoned, accurate tax guides. While I may not agree with 100 of their conclusions, that likely reflects true uncertainty around tax law that is fundamentally complex rather than an attempt on either end to help individuals unlawfully avoid taxes.IRS guides IRS Notice 2014-21 on crypto currency IRS Publication 550 - Investments IRS Topic 409 - capital gainslosses IRS Topic 420 - bartering income IRS guide to taxable income Non-IRS treasure trove discussion 1 and 2Non-IRS guides Coinbase statement CoinDesks Tax Guides Forbes Discussion Cryptocurrency facts Turbo Tax Discussion Investopedia Discussion  <response>: This is the best thing Ive read on reddit in a while, well done OP! After having sent many people IRS Notice 2014-21 I was starting to think I was the only person who had read it. 