Learn how Bitcoin is taxed and get tips from accountants who specialize in digital currency.
How Bitcoin Is Taxed
A very common question for newcomers to crypto investing: Is Bitcoin taxed or can Bitcoin be taxed? Despite the fact that regulators in many countries have been working for a long time to form a regulatory framework for the taxation of the cryptocurrency industry, a universal solution has still not been found. Different countries interpret what Bitcoin and altcoins are in their own way, trying to fit them into the legislative framework.
In the US, at the moment, Bitcoin and other digital coins are not considered as a currency or a means of payment, but as property. The US Internal Revenue Service (IRS) decided this back in 2014, and the status of cryptocurrencies has not changed over the years. What does this mean in terms of taxes for US citizens? When Bitcoin is bought, sold, or traded, it is necessary to pay taxes to the state for it.
How You Receive Bitcoin Matters for Taxes
One of the most exciting questions for miners, investors, and traders: does the way Bitcoin is obtained affect taxes?
Yes, it affects taxation. Let’s get this straight. As for mining — it is considered a taxable event. This means that the miner needs to calculate the market value of Bitcoin on the day of its production, enter it in the tax return and pay income tax on it. The tax for mining cryptocurrencies is levied if the income exceeds $400. For this purpose, taxation is applied for the self-employed — 15.3%.
When you exchange Bitcoin for US dollars or other recognized currency, the real market value of it is determined by the exchange rate where you make the transaction at that very moment.
Special conditions also apply when you receive Bitcoin as a gift or donate it to charity. If Bitcoin is given to you, you do not pay tax for it, but only until you exchange it for fiat money or spend it on some product or service. Therefore, it is important to clearly know what value the Bitcoin that you were given has.
These are all very confusing conditions that are not easy to comply with. Therefore, many recommend simply trying not to spend, not to exchange Bitcoins and any digital currency until the tax system regarding cryptocurrencies becomes more simple and understandable.
Capital Gains vs. Capital Losses
It is very important to understand in detail. So how are bitcoin gains taxed?
If the purchase price is lower than the sale price of Bitcoin, then the difference is your profit, which is taxable. If the sale price was lower, that is, the exchange rate during the ownership of Bitcoin fell, then the difference turns out to be a loss.
And it is important to understand that such losses in cryptocurrency are classified by the Tax Code as investment losses. Since despite the way you receive Bitcoin, it is considered as a transaction concluded for the purpose of making a profit.
It turns out that if you have stolen digital coins, it will be considered a tax loss. In this case, if you lost, for example, $ 10,000, you record a loss of $ 10,000 in the tax report.
Reporting Cryptocurrency Activity
As we said IRS taxing Bitcoin. And the most difficult moment — to carefully track and mark all transactions and other actions with cryptocurrency in order to enter them in the tax return. It is very important that there are no problems. You must notify the tax service about all transactions with Bitcoin, without missing anything and correctly indicating the profit and loss.
The IRS recommends that you keep a record of any receipts, sales,exchanges, or other dispositions of digital currency and fair market value at the time of transactions.
Soon, cryptocurrencies will also have to be accounted for in the Report on Foreign Banks and Financial Accounts. This means that the movement of digital funds is becoming increasingly controlled by the tax authorities.
Over time,we hope that the mechanisms will become more streamlined to simplify reporting. However, remember that you can not just close your eyes at this point and do not indicate income or expenses in cryptomonets — the consequences can be serious and relate to tax evasion.
An Example of Capital Gains Tax
Let’s look at an example of how the tax rate is calculated for Bitcoin owners. Let’s say you bought $ 10,000 worth of BTC. It grows 2 times within a month — and you decide to sell it. Your profit, since it has now reached the value of $ 20,000, is equal to $ 10,000. In this case, Bitcoin is taxed as ordinary income according to your tax category, since you have owned it for less than a year.
If the same thing happened, say, in 15 months, then this is already the category of long-term profit. In this case, the rate of 0%, 15% or 20% is valid — here your total amount of income will be decisive.
If you take the time to understand the subtleties, the tax reporting on Bitcoin will not be so frightening. Especially if you listen to the recommendations and carefully enter all transactions and note the real market value of tokens at the time of purchase/sale/exchange/mining.
How to Pay Taxes on Bitcoin
First of all, take care of personal accounting of transactions with cryptocurrency. You can install a program that will help you track when and what transactions with BTC you made and what was the real market value of the currency. Maintaining a detailed, meticulous record of Bitcoin or other digital coin transactions ensures that revenue is measured accurately, and this, in turn, guarantees you no problems with the tax authorities.
In general, there is a fairly standard reporting scheme for determining the amount of tax payments. By the way, you also have a great opportunity to compensate for profits with losses, use a strategy and distribute your assets on time.
If you are difficult, lazy, or have no time to deal with all the processes of accounting and tax reporting, you can contact a tax specialist who can easily help you with this. Pay close attention to the tax reporting dates. Usually, the tax return must be submitted to the relevant authorities no later than April 15 of each year. However, the pandemic and its consequences changed the conditions slightly, and the IRS extended this deadline in 2021 until May 17.
Tax Tools for Bitcoin
First of all, we recommend that you select and install an application or program that will help you to facilitate tax accounting. For example, Koinly, CryptoTrader — apps for easily importing your cryptocurrency and transaction data and uploading capital gains tax forms such as 8949, Schedule D, and export to Turbotax.
There is also a Bitcoin.tax service that takes your transactions into account and calculates your profit. How to use bitcoin.tax — it is easy to understand on the site itself. It’s very simple.
Therefore, it is very important to choose an exchange and wallets that have a sufficient degree of security and legality to provide all the necessary information for reporting. This not only reduces your financial risks, but also facilitates the relationship with investing in terms of tax reporting and the ability to “automate” the process.
FAQ
When Do You Have to Pay Taxes on Bitcoin?
Is Bitcoin Taxed? Of course, as you already understood from the article. At the moment, BTC is classified as a valuable property and is taxed just like any other income you earn. It does not equate to standard fiat currencies, so it is important to remember how the tax authorities work with it. First, BTC mining is also taxed. Secondly, the exchange, sale or use of a coin as payment for goods or services is a transaction that is accounted for by the tax authorities. You pay tax on any profits made as a result of transactions with cryptocurrencies. Therefore, do not forget to mark each operation and most importantly-the real market value of the digital coin at the time of its commission.
The advantage is that you can take into account not only the income on the crypto but also make losses if you have lost funds.
How Is Cryptocurrency Taxed?
Cryptocurrencies, including Bitcoin, are included in the category of property and are taxed in this way. There is a difference in how long you have made a profit from the crypto token. If you hold the coins for less than 1 year and decide to sell, the bet will be as on your usual income. If the term of ownership exceeds 1 year — we are talking about the amounts of 0% / 15% / 20% — here everything depends on your total income.
To make it easier to keep track of Bitcoin taxes, contact a specialist who will help you with this. Since tax reporting is too important.
What Happens If You Don’t Pay Taxes?
A common misconception is that taxes and Bitcoin are not related in any way. If you think that this source of income is not sufficiently defined and controlled by the Tax Service, you are mistaken. At a minimum: all Bitcoin transactions are stored in the public domain, so everyone, including representatives of the tax authorities, will be able to verify them. You will not be able to simply not pay taxes on cryptocurrency, referring to the fact that you did not know that you needed to do it and did not know how to do it.
Don’t pay Bitcoin taxes? You’ll have to pay a percentage. You will pay interest on the tax, and you will also be fined 5% per month. Repayment of the debt may be charged at the expense of your other property or bank accounts.
Therefore, we highly recommend that you pay attention to the accounting of transactions and pay Bitcoin taxes in a timely manner, so that the crypto investment brings you only income and joy from it. Hopefully, we will live to see the time when we can pay taxes in Bitcoin.
