Making a Killing in Bitcoin? Don’t Forget the IRS

Cryptocurrencies like bitcoin may not be regulated by the government, but they're still subject to being taxed. There have been various forms of digital currencies around for years, but several have taken off in popularity recently. And that may leave some newcomers to this marketplace unaware that they face taxation on their dealings.

The IRS says that cryptocurrency transactions are taxable by law. That means people who made money (or lost it) on bitcoin trades, "mined" ethereum or even bought a cup of coffee with digital currency face potential tax implications. Failure to report it could mean potential audits, fines and penalties.

There are also people who may be upset to find that cryptocurrencies, which are not linked to a government or central bank, aren't as off-the-grid as they hoped. Part of their appeal is that it could be used as a new, more anonymous kind of currency that operates outside the traditional banking system and government oversight.

"There's a very strong sentiment that taxing cryptocurrency is sort of sacrilegious," said Tyson Cross, a tax attorney in Reno, Nevada who specializes in this niche. "But most people understand there is a difference between upholding a principle on an anonymous internet forum and going to jail over it."

The IRS didn't weigh in on how to tax digital currency until 2014 and that remains its only guidance to date. We spoke to a few experts to help break down the basics:

Wait, I Owe Taxes on This?

Yes, most likely.

All digital currency transactions are taxable events, according to the IRS. That includes if you sell it, trade it, "mine" it, use it to pay for something or were paid with it. Even if you sell cryptocurrency and keep the gains in your exchange account, instead of as real cash in checking account, it's still taxable.

Bought some bitcoin...

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