It’s important to know before reading this article what cryptocurrencies are. Cryptocurrencies are digital currencies that exist only online and is a complex system that’s decentralized and isn’t controlled by any authority. Computer processors are used to solve complex algorithms which generate coins. All coin transactions are chained to each other, adding a block for each transaction making it impossible to erase or alter any information without breaking the entire chain. Crypto markets are the most secure for services and trade without the risk of fraud or chargebacks.

One of the biggest market explosions for cryptocurrencies in 2017 is Bitcoin. In 2017 alone, prices for one bitcoin has skyrocketed from $800 to a whopping $7,300! Rewind to 2013, the price for one was less than $10! There’s a huge profit margin with Bitcoin, and other cryptocurrencies such as Litecoin and Ethereum are slowing making a name for themselves as well.

However, bitcoin and other cryptocurrencies still are taxable, and the IRS still wants its share of the exponentially rising market. In 2014, the IRS issued Notice 2014-21, which gave them the power to impose taxes on virtual currencies. Last year in 2016, the IRS gave Coinbase – one of the largest coin exchanges globally – a "John Doe" summons to report everyone that’s used their exchange dating back to 2013, and recognized less than 900 of all investors have reported capital gains or losses. That’s something for all of us invested in digital currency to worry about, as this year the IRS hired Chainalysis – a company capable of identifying owners of digital wallets – and they’re ready to crack down on those profiting off the digital market.

How to Report Your Digital Coin Wallet

So how are you to report your taxes on digital currency? It’s important to know your coin exchange service won’t help much with tax reporting. Blockchains which chronologically record all cryptocurrency transactions aren’t so great at generating online tax reports. In addition, digital currencies don’t fall under "covered security" in the tax code, so you can’t use a Form 1099-B like you would with traditional stock trades.

Presently, there are trade accounting solutions that are entirely about cryptocurrency. Bitcoin.Tax and CoinTracking.Info are making it easy for coin users to report their gains and losses to the IRS. Most digital coin markets, such as Coinbase, make it possible to export all transactions into a readable solution such as a spreadsheet or PDF which you and your tax accountant can use to fill out Form 8949. Submit this form, along with all other tax documents, when tax season rolls around at the beginning of next year.

Here’s a few more things to keep in mind when reporting cryptocurrencies to the IRS for the upcoming tax season. The dollar value of your digital coins at the time of you filling out your tax forms is what the IRS will accept as fair market value. If you’re a ‘miner’ of Bitcoin or other digital currencies and sell them on a coin market, it’s constituted as a trade or business and the IRS will subject you to self-employment tax. If this year is the first year that you are reporting your digital currency transactions, you may want to amend past year’s tax returns to keep up with the IRS and avoid civil penalties in the future.