For most of it, Bitcoin could be an unregulated asset, however, the IRS will still want a share of the transactions made using this virtual currency, why?
Bitcoin or even any other virtual currency for that matter is a taxable asset, which means, all of the transactions one makes using these currencies are expected to be reported on their tax return.
In the eye of the IRS, it does not matter if – the Bitcoin is acquired, or even disposed of. Irrespective of the situation, it must be reported on the tax returns on any income or capital loss/gain indicated.
This is why it is of utmost importance to report a tax on Bitcoin. Nevertheless, the process could be a bit mind-boggling since it’s a matter of cryptocurrency.
To help you out and ease the process, here are a few points that we will discuss in the article below in order to know how is bitcoin taxed:
Now that we are aware of the gist, let's quickly dive into the topics here, one by one!
As we have mentioned above, Bitcoin is considered equivalent to a property in the eyes of the IRS. Irrespective of how you may choose to view or use this cryptocurrency, for tax purposes, the IRS states Bitcoin or other digital currencies solely as a taxable property and not a currency, in order words, they are capital assets similar to stocks.
It makes no difference if you choose to sell it as an investment or transfer the same in return for goods or services. Any change that takes place between its value at the time of transfer or sale, its cost of acquisition is treated similar to that of a capital gain or loss, taxed accordingly.
On the flip side, this is actually good news for the long-term owners of Bitcoin since they receive more favorable tax treatment. The currency here is taxed as per the income rates that are less favorable when compared to the capital gains tax rates.
In case you held onto Bitcoin for more than one year prior to selling it for a “gain,” you will be expected to only pay the capital gains taxes of 15% (this is, 20% for individuals earning around $441,450> and as low as 0% for those earning less than $80,000).
Nevertheless, if Bitcoin is held for less than a year before selling it, you must pay the ordinary income tax rates over the gains as per the tax rate.
Yes, the mode of receiving and the use of Bitcoin does have an impact on the taxes you pay. For example, when an individual chooses to mine a Bitcoin, it turns into a taxable event. Here, you must calculate the value of the Bitcoin fair market on the day it was mined and pay the tax on it.
One can easily determine the fair market value by simply converting the cryptocurrency in hand into US dollars (or any other real currency that can be converted into US dollars) as per the established exchange rate that is listed on the exchange.
In simpler words, the fair market value is equivalent to the cryptocurrency's value of the current date and time of the transaction on the distributed ledger. In case the transaction fails to record on the ledger, then you can use the latest recorded time, had it been a recordable event.
Adding on, the difference between the Bitcoin cost basis, that is generally the paid amount when acquired and the fair market value of the day, would result in either a gain or a loss that needs to be reported while filing your taxes.
Mostly, yes! There are only a few Bitcoin transactions that don't result in the immediate taxable event like when you receive Bitcoin as a gift or choose to donate it to charity.
Nevertheless, once you dispose of the gifted Bitcoin, you will have to pay the taxes accordingly. This means you must be sure of the cost basis of the gifted Bitcoin, depending on whether it’s a gain or loss when sold or disposed of. If it is a “gain”, then the basis could be the donors in addition to the gift taxes paid by the donor. On the other hand, if it is a “loss,” then your basis will be less from the basis of the donor or the value of the fair market at the time of receiving. If none and/or there is no way for you to know the donor's basis, then you’d get to record the cost basis of zero dollars.
As you must be well aware of the practice now, it is extremely crucial for you to keep a meticulous record of the Bitcoin transactions, especially when it comes to paying taxes.
Unfortunately, as owning digital currency isn't as simple as owning a stock, it may not issue a 1099 form that can help you with the reporting of tax. This means it is up to the individual to notify the IRS of any gain and loss associated with the Bitcoin taxable event.
The IRS is strict and recommends all individuals to keep records documented with receipts, exchanges, sales, or other dispositions of any digital currency and the current fair market value.
The IRS updated the 1040 tax return form this year and directly asked the taxpayers whether they have received, sent, sold, exchanged, or otherwise acquired any cryptocurrency.
We hope this blog post has helped you understand the basics of - how Bitcoin is taxed. Make sure to be well informed about the current market value and the gain/loss due to the Bitcoin transaction to be on the safer side of the IRS.
In the eye of the IRS, it does not matter if – the Bitcoin is acquired, or even disposed of. Irrespective of the situation, it must be reported on the tax returns on any income or capital loss/gain indicated.
Bitcoin is considered equivalent to a property in the eyes of the IRS. Irrespective of how you may choose to view or use this cryptocurrency, for tax purposes, the IRS states Bitcoin or other digital currencies solely as a taxable property and not a currency, in order words, they are capital assets similar to stocks.
One can easily determine the fair market value by simply converting the cryptocurrency in hand into US dollars (or any other real currency that can be converted into US dollars) as per the established exchange rate that is listed on the exchange.
Bitcoin or even any other virtual currency for that matter is a taxable asset, which means, all of the transactions one makes using these currencies are expected to be reported on their tax return.
Taxing Of Bitcoin - How Is Bitcoin Taxed?
In the eye of the IRS, it does not matter if – the Bitcoin is acquired, or even disposed of. Irrespective of the situation, it must be reported on the tax returns on any income or capital loss/gain indicated.
This is why it is of utmost importance to report a tax on Bitcoin. Nevertheless, the process could be a bit mind-boggling since it’s a matter of cryptocurrency.
To help you out and ease the process, here are a few points that we will discuss in the article below in order to know how is bitcoin taxed:
- Bitcoin - a property and not a currency
- Receiving Bitcoin and the matters for taxes
- The reporting of tax to the IRS
Now that we are aware of the gist, let's quickly dive into the topics here, one by one!
1) Bitcoin - A Property And Not A Currency
As we have mentioned above, Bitcoin is considered equivalent to a property in the eyes of the IRS. Irrespective of how you may choose to view or use this cryptocurrency, for tax purposes, the IRS states Bitcoin or other digital currencies solely as a taxable property and not a currency, in order words, they are capital assets similar to stocks.
It makes no difference if you choose to sell it as an investment or transfer the same in return for goods or services. Any change that takes place between its value at the time of transfer or sale, its cost of acquisition is treated similar to that of a capital gain or loss, taxed accordingly.
On the flip side, this is actually good news for the long-term owners of Bitcoin since they receive more favorable tax treatment. The currency here is taxed as per the income rates that are less favorable when compared to the capital gains tax rates.
In case you held onto Bitcoin for more than one year prior to selling it for a “gain,” you will be expected to only pay the capital gains taxes of 15% (this is, 20% for individuals earning around $441,450> and as low as 0% for those earning less than $80,000).
Nevertheless, if Bitcoin is held for less than a year before selling it, you must pay the ordinary income tax rates over the gains as per the tax rate.
2) Receiving Bitcoin And The Matters For Taxes
Yes, the mode of receiving and the use of Bitcoin does have an impact on the taxes you pay. For example, when an individual chooses to mine a Bitcoin, it turns into a taxable event. Here, you must calculate the value of the Bitcoin fair market on the day it was mined and pay the tax on it.
How to determine the fair market value?
One can easily determine the fair market value by simply converting the cryptocurrency in hand into US dollars (or any other real currency that can be converted into US dollars) as per the established exchange rate that is listed on the exchange.
In simpler words, the fair market value is equivalent to the cryptocurrency's value of the current date and time of the transaction on the distributed ledger. In case the transaction fails to record on the ledger, then you can use the latest recorded time, had it been a recordable event.
Adding on, the difference between the Bitcoin cost basis, that is generally the paid amount when acquired and the fair market value of the day, would result in either a gain or a loss that needs to be reported while filing your taxes.
Do all transactions result in an immediate taxable event?
Mostly, yes! There are only a few Bitcoin transactions that don't result in the immediate taxable event like when you receive Bitcoin as a gift or choose to donate it to charity.
Nevertheless, once you dispose of the gifted Bitcoin, you will have to pay the taxes accordingly. This means you must be sure of the cost basis of the gifted Bitcoin, depending on whether it’s a gain or loss when sold or disposed of. If it is a “gain”, then the basis could be the donors in addition to the gift taxes paid by the donor. On the other hand, if it is a “loss,” then your basis will be less from the basis of the donor or the value of the fair market at the time of receiving. If none and/or there is no way for you to know the donor's basis, then you’d get to record the cost basis of zero dollars.
3) The Reporting Of Tax To The IRS
As you must be well aware of the practice now, it is extremely crucial for you to keep a meticulous record of the Bitcoin transactions, especially when it comes to paying taxes.
Unfortunately, as owning digital currency isn't as simple as owning a stock, it may not issue a 1099 form that can help you with the reporting of tax. This means it is up to the individual to notify the IRS of any gain and loss associated with the Bitcoin taxable event.
The IRS is strict and recommends all individuals to keep records documented with receipts, exchanges, sales, or other dispositions of any digital currency and the current fair market value.
The IRS updated the 1040 tax return form this year and directly asked the taxpayers whether they have received, sent, sold, exchanged, or otherwise acquired any cryptocurrency.
To Conclude:
We hope this blog post has helped you understand the basics of - how Bitcoin is taxed. Make sure to be well informed about the current market value and the gain/loss due to the Bitcoin transaction to be on the safer side of the IRS.
FAQs: How Is Bitcoin Taxed? Your Ultimate, All-In-One Guide
1. According to the IRS, should the tax be reported always?
In the eye of the IRS, it does not matter if – the Bitcoin is acquired, or even disposed of. Irrespective of the situation, it must be reported on the tax returns on any income or capital loss/gain indicated.
2. Is Bitcoin a currency or a property?
Bitcoin is considered equivalent to a property in the eyes of the IRS. Irrespective of how you may choose to view or use this cryptocurrency, for tax purposes, the IRS states Bitcoin or other digital currencies solely as a taxable property and not a currency, in order words, they are capital assets similar to stocks.
3. How can an individual determine the fair market value?
One can easily determine the fair market value by simply converting the cryptocurrency in hand into US dollars (or any other real currency that can be converted into US dollars) as per the established exchange rate that is listed on the exchange.
