I have a number of bitcoins. I’m not writing that word anywhere on my tax return and I recommend you don’t either.
Filing taxes is complicated. File incorrectly and you could be subject to an audit or other inconveniences. Bitcoin is a new and uniquely complicated tax problem. Unless you have personal expertise in the field it is probably not a good idea to go off and file for yourself, but that is not my concern.
Bitcoin is complex to file correctly. Depending on how it is obtained, stored, used, and/or sold, it may need to be filed as income, capital gains, or a combination. I recommend you use TurboTax to handle this because it offers audit insurance. File your bitcoin as either miscellaneous income or capital gains.
If you have the choice, go for capital gains (ehem…or losses as the case may be). It’s a lower rate. If you want a very low rate and you’re a touch brave, try filing as an OTC forex trader.
Yes, I will be paying taxes on my bitcoin, but I will put that word nowhere on any form. Perhaps I will call it gains from commodity trading, foreign currency trading, trading stocks (I did trade btc-denominated stocks), income from lending to friends, income from peer to peer lending (I did use btcjam.com), income from a garage sale, or even a gift from a friend. Or something else. But I won’t call it bitcoin.
Why am I freaking out about putting the word bitcoin, or digital currency, or crypto-anything on my tax return? For the same reason I won’t be reporting donations to a number of charities and political organizations. I’m worried about IRS targeting, plain and simple.