How Bitcoin Is Taxed
If you have completed your taxes this year, you would have noticed that virtual currency transactions must be reported on page 1 of your individual tax return. Bitcoin is a decentralized cryptocurrency that uses peer-to-peer technology for instant payments between people or businesses. It can be bought and used as a currency and also is a type of investment. In 2014, the IRS has ruled that Bitcoin and other “convertible virtual currencies” must be treated as property, not as currency. There are, therefore, tax consequences whenever Bitcoin is bought, sold, or traded. This might sound like a minor distinction, but it’s not. It determines how Bitcoins are taxed, the information you’ll need to make sure your taxes are calculated correctly, and what tax-planning techniques you can use to try to minimize your taxes on Bitcoin transactions. This section on taxes and how they may affect you was written by William Perez, a tax expert with 20 years of experience who has written hundreds of articles covering topics including filing taxes, solving tax issues, tax credits and deductions, tax planning, and taxable income. He previously worked for the IRS and holds an enrolled agent certification. This article can be viewed in its entirety including IRS codes by following the link below.
The IRS and Virtual Currency
The IRS has indicated that virtual currency doesn’t have status as legal tender in any jurisdiction. It’s referred to as “convertible” virtual currency if it has an equivalent value in real currency, or if it ever serves in place of real currency. It can be exchanged into another currency, either real or virtual, and it can be digitally traded.
When Do You Have to Pay Taxes on Bitcoin?
The IRS further indicates that Bitcoin is treated as property and is subject to general tax principles. You must include in the fair market value of the currency in U.S. dollars in your gross income if you’re paid in Bitcoins for goods or services. Transactions using virtual currency should be reported in U.S. dollars. The fair market value of Bitcoins can be established by converting them into U.S. dollars at the current exchange rate at the time they’re received.
You’ll also have a capital gain or a capital loss if you dispose of Bitcoin, because it’s considered property for tax purposes. A gain represents income, and income is taxable even if you’re paid in virtual currency. “Every Bitcoin transaction is taxable,” writes Tyson Cross, a tax attorney who specializes in virtual currencies. “Bitcoin users will have to calculate their gain or loss every time they purchase goods or services with Bitcoin.” As with other types of property, you would acquire it first, often by exchanging cash for the asset. You then own the property for a period of time, and you might eventually sell it, give it away, trade it, or otherwise dispose of it. Capital gains taxes come due at this point.
Four things will happen when property is disposed of:
-
-
Income is realized from any gain.
-
Gain is measured by the change in the dollar value between the cost basis or purchase price and the gross proceeds received from the disposition or the selling price.
-
The tax rate that applies depends on whether the property was held for one year or less (a short-term gain) or for more than a year (a long-term gain).
-
Disposition of property is reported on your tax return using Schedule D and Form 8949 or Form 4797. These forms require that you “show your math” when you’re calculating a gain or loss. You’ll do your calculations right on the form, per instructions.
-
Comments
How Bitcoin Is Taxed — No Comments
HTML tags allowed in your comment: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>