While the tumultuous gold rush of Bitcoin in 2017 may be over, it did make Bitcoin a more common currency in day to day operations. If you do freelance work on the side and got paid in Bitcoin, it can make paying your taxes a little more complicated. Here are three tips to keep in mind.
1. Informally convert each payment on the day you get it.
As far as income taxes are concerned, Bitcoin payments need to be translated into USD payments. Even if you keep the Bitcoin as Bitcoin, mark down the conversion rate and the converted USD value as of the day the payment was posted. You’ll need those records to calculate your taxes, and it’s much easier (and cleaner) to build up the USD records over time.
2. Start taxes early.
This is good advice any time you have a complex tax situation, the earlier you start, the more time you have to gain a good grasp of the situation. If you have to make quarterly payments, it’s even more essential to have those predictions in place. This also gives you plenty of time to consult with a tax professional if you feel like your total bill doesn’t feel right.
3. Differentiate between ‘income’ Bitcoin and ‘investment’ Bitcoin.
If you’re getting paid in Bitcoin, you might also have some Bitcoin investments. Clearly document the difference between the two. It’s just like the differences between USD income and money in your investment accounts. While funding your HSA or 401(k) with Bitcoin might not be on your to-do list, keeping the two categories separate makes it easier to explain your situation to a tax professional, a business investor, or even an IRS auditor.
Virtual currencies are becoming easier to use and more common in online freelance work. But the mechanisms for reporting them in your taxes haven’t become quite as commonplace. Reach out to us at Roberts Tax & Retirement Planning to make it simple.