Bitcoin and Taxes

With Bitcoin, it can be easy to accidentally run afoul of the IRS, so it’s important to learn the rules. Bitcoin and other cryptocurrencies that buy, sell, mine, or use to pay for things can be taxable.

If you are paid in cryptocurrency, this is taxable income. You report your transactions in US dollars, which usually means converting the value of your cryptocurrency to dollars when you buy, sell, mine, or use it. Here’s how Bitcoin could affect your taxes. 

How Secure Are Transactions Done Through Bitcoins?

Bitcoin And Cryptocurrencies Are Property

The IRS views cryptocurrency as property, not currency, for tax purposes. This may sound trivial, but it’s the basis for when the IRS decides that you owe taxes

Here are the basic ‘realization events’ that make your Bitcoin taxable:

  • If you acquired a bitcoin (or part of one) through mining, the value is taxable immediately, whether you sold the currency or not.  
  • If you disposed of or used bitcoin by cashing it on an exchange or buying goods and services, you will owe taxes if the value (the sale price of the bitcoin, for example) is higher than the price that you acquired the bitcoin for. You might have a capital gain that is taxable at either short-term or long-term rates. 

A lot of people think that there aren’t any tax consequences when they sell an object. It’s for personal use and they’re expecting to lose money on it, whether they’ve bought a car, an appliance, or another piece of property.

Most people aren’t in the mindset of holding tangible objects for investments and then recognizing them as gains when they sell them. Bit if there has been a gain from the owner of the bitcoin’s cost basis, there is a tax liability. 

Record-Keeping Is Key

To make sure you are able to stay on the right side of the rules, you need to keep careful track of your cryptocurrency activity. Visit website to keep track of your taxable digital assets and avoid getting yourself confused and missing something. 

You will need records of what the fair market value of your bitcoin was when you mined or bought it, as well as records of the value when you used or sold it. This information is what you will use to calculate your bitcoin taxes. 

This information might not easily available to you. If you were buying and selling stocks, for example, then your broker would send you a form that would clearly show the cost basis of your transaction. Unfortunately, with bitcoin, you might receive this.

This is a big part of the reason that a lot of people have no idea that they’re liable for taxes on their bitcoin. It’s an easy way to accidentally run afoul of IRS laws.

You’re conditioned with the receipt of a 1099 form to know that you have a taxable event and what that taxable gain is. You don’t get always get this with bitcoin. A lot of people are simply not being told from the exchange in a manner that they would expect. 

You might be issued with a Form 1099-K if you’re transacting more than $20,000 in payments and 200 transactions a year. Both of these conditions have to be met and a lot of people might not be using bitcoin more than 2000 times in a single year. Whether you cross both of these thresholds, you will still owe tax on any gains. 

Not paying taxes on your gains could well be an honest mistake, but the IRS is unlikely to take pity on you. The agency has already sued at least one cryptocurrency broker for the records of people who may not have reported their bitcoin gains. 

If Your Bitcoin Is Stolen, Tough

Being stolen from is upsetting enough, and previously, if you had your bitcoins stolen, you might have been able to deduct it as a theft loss on your taxes. However, new tax rules have come in that get rid of the deduction for personal theft losses. 

Another tax rule doesn’t look too favorable for those who own digital currency. The IRS allows owners to trade several kinds of property for a similar kind of property without incurring a tax liability. This is called a like-kind exchange. 

Before the tax law changes were brought in, bitcoin owners weren’t sure whether they could engage in like-kind transactions with other cryptocurrencies, as the information from the IRS was unclear. What made it unclear was the indecision on whether one crypto is like-kind to another. With the new tax reform, like-kind exchanges have been limited to real property, not personal goods, including bitcoin.

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