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How are taxes (federal and California) calculated for

bitcoin transactions? I had a few...
How are taxes (federal and California) calculated for bitcoin transactions?
I had a few transactions of the following types:
1. Buy bitcoins
2. Sell bitcoins
3. Send bitcoins to 3rd partyAll these transactions were done via CoinBase.If some sell/send transactions resulted in losses and some resulted in gains, shall I subtract losses from gains?
Shall I use FIFO principle to calculate cost basis for gain/loss?
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Answered in 15 minutes by:
1/14/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 31,229
Experience: Taxes, Immigration, Labor Relations
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According to teh IRS - bitcoins are not classified as currency - but are treated as assets.

When bitcoins are purchased - the purchase price is your basis.

When you sell bitcoins - that transaction is reported on your tax return - and a gain or loss is realized.

The gain or loss is calculated in the same manner as for shares or any other assets.

(sale price) MINUS (basis) = gain/loss

You may choose which bitcoins you selling - and specify that when you report the sale.

If you do not specify - FIFA principle is used as you suggested.

You will combine all capital losses and gains - and will calculate for specific tax year - net gain or loss.

.

When you send bitcoins to the third party - we need to know the reason of that transaction for proper classification.

If that is an exchange for another asset or that is a payment for services - that is classified as deemed sale.

Let me know if you need any help with reporting.

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Customer reply replied 1 month ago
the purpose of sending to another party is a payment for services.
What does "deemed sale" mean?
"combine all capital losses and gains" - does it mean that if I had $100 gain from one sale and -$100 loss from another then total gain/loss will be 0?
Customer reply replied 1 month ago
Also, how shall I report gain/loss to IRS? Is there any special form for that?

What does "deemed sale" mean?

In this situation - deemed sale means that such transaction is treated as a barter - for tax purposes it is reported as two sequential transactions - (1)sale bitcoins for its FMV and (2) using proceeds as a payment for services.

does it mean that if I had $100 gain from one sale and -$100 loss from another then total gain/loss will be 0?

Yes - that is exactly correct - all gains and losses realized during the tax year are combined and offset each other.

Also, how shall I report gain/loss to IRS? Is there any special form for that?

Correct - you report each sale transaction and calculate gain or loss separately for each transaction.

These are reported on form 8949 included into your tax return.

https://www.irs.gov/pub/irs-pdf/f8949.pdf

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 31,229
Experience: Taxes, Immigration, Labor Relations
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