How I Paid My Bitcoin Taxes

Tax day is usually not very complicated for me. I’ve used an accountant for years and simply meet with him annually to make my financial confession. It typically takes an hour. This year, though, was a bit different. We had to talk Bitcoin.

On March 25, I sent my accountant a link to the new IRS guidance on Bitcoin. With the price of Bitcoin soaring from $13 to $1,100 in 2013, people who got in low and sold high made real money off of it, and the government wants in on the proceeds, with the IRS declaring just weeks before the dreaded April 15th deadline that virtual currencies be treated like stocks. I let my accountant know it was going to make my taxes more “interesting” this year. Almost exactly a year prior, I had bought 7 Bitcoin for just under $900 and then spent a week living on them. I made the address of my Bitcoin wallet public. I spent almost 5 Bitcoin on food, shelter, a bike rental and a surprise crash diet. Over the course of the week, I (awkwardly) received over $1,000 (or approximately 15 Bitcoin) from 86 strangers who were excited about my experiment. That was an ethical quandary for me, and I took care of it by blowing it on a dinner for a bunch of Bitcoin enthusiasts (a.k.a. randos rounded up from Reddit’s Bitcoin page) at a BTC-accepting sushi restaurant. That was the most “interesting” situation come tax-time.

The IRS guidance isn’t actually that complicated, but the record-keeping it makes necessary is. You have to keep track of how expensive your Bitcoin is when acquired — whether you bought it or “mined” it by making your computer a slave to the Bitcoin network — and then declare capital gains or losses based on the increase or decrease of its value when cashed in or spent. Luckily for me, I used Coinbase and Blockchain for my Bitcoin spending, not Mt. Gox. The Tokyo-based exchange MtGox imploded this year, “and no one has been able to access their trade history,” laments Bitcointaxes.info, advising people “to file an extension and hope that MtGox gives access to their historical records before October 2014.” Even if Coinbase and Blockchain went the way of Gox, I had made a detailed expense report that included what I spent on Bitcoin that week and its value when I spent it. And I’m glad I did, because Coinbase doesn’t track Bitcoin’s value at the time it’s transferred (though Blockchain does).