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A Guide To Bitcoin Taxes: All Questions Answered!

The cycle of Bitcoin is fairly simple, if you own or use a Bitcoin, you will also owe taxes irrespective of how you acquired or used the coin. 

But, how is using Bitcoin similar to taxes? Is owning a Bitcoin equal to an affected tax situation? Let’s find answers to these questions from this quick read below.

The big picture yet, Bitcoin or even any other cryptocurrencies for that matter that you buy, mine, sell, or use as a medium to pay for things is all taxable. Having said that, even if your employer/client happens to pay you in bitcoin or in other cryptocurrencies, it is a taxable income. 

Why? During the process, you are expected to report the transactions in U.S. dollars, this, for obvious reasons, means converting the cryptocurrency value into dollars when brought, sold, mined, or used.

Photo by Ivan Babydov from Pexels

Photo by Ivan Babydov from Pexels

Effect Of Bitcoin On Taxes: 

Here are more ways on how the simple act of using a Bitcoin could cause an effect on your taxes:

1. Bitcoin And Other Cryptocurrencies = Property

Back in 2014, the IRS issued a notice that declared the tax purpose and cryptocurrency as a property and not a currency. Although it may sound like a trivial distinction here, it’s the basis for when the IRS decides upon if the individuals owe taxes or not. 

Adding to this, these Bitcoin consequences on tax revolve in and around what the government agency calls – “realization event.” Here:

  • If an individual acquires a Bitcoin to mine, then the value immediately becomes taxable. You need not sell or create a tax liability to the currency
  • On the other hand, if you usually dispose or use Bitcoin by cashing in exchange for buying goods and services, even then you owe taxes, provided the realized value is greater than the price acquired by the bitcoin. 

2. The Key Of Keeping Records

It is extremely important to make sure that you stay on the “good” side of the rules by keeping track of the cryptocurrency activity. But first:

  • You’ll need the records of the value of the Bitcoin fair market value at the time of mining or when you bought it in addition to the records of the fair market value when it was used or sold. Knowing this will help you to easily calculate the taxes on your Bitcoin
  • Having said that, it is possible that this information might not be easily available. For instance, if you were selling or buying stocks, the broker will send a “1099-B Form” which shows the cost basis of the transaction. But, fortunately, with Bitcoin, this is not the case, here you might not receive a form, the reason why most people are not aware of their liability on bitcoin taxes
  • The 1099-K form can be issued if you are transacting for anything more than $20,000 payments and 200 transactions a year. But, even here, the conditions are to be met. If you cross these thresholds or not, you may still owe taxes on any gains.
  • It is true that in a few cases of not paying taxes could be a result of an honest mistake, you can’t expect the IRS to take pity on it. As per records, the agency has sued a cryptocurrency broker for not reporting the bitcoin gains.

3. Stolen Bitcoin 

As for the earlier tax law, if one was robbed of the Bitcoin, s/he was able to deduct it as a loss of theft on the taxes. However, for now, unfortunately, due to the new tax rules, there is no deduction for personal theft losses.

4. The Relief Factor On Bitcoin Taxes

Even though Bitcoin taxes have so far sounded awful, there are positive sides to it too. You can deduct capital losses on Bitcoin like the losses on stocks/bonds. Losses like these can offset the capital gains on sales. 

Having said that, be mindful when tallying the winners as opposed to the losers, you cannot write a loss for more than $3,000. 

Note – Given the drastic fluctuations in the prices of Bitcoin that take place all the time, most Bitcoin currencies have losses. If you are one of them, make sure to declare them on the tax return and see if the tax liability can be reduced.

To Conclude:

We hope that the article above has helped you understand the tax implications on Bitcoin and how it can be looked into to be on the safer end of taxation. Having known these, we’re sure for you to have a much better and learned experience with Bitcoin and other cryptocurrencies. 

FAQs: A Guide To Bitcoin Taxes: All Questions Answered!

  • What is a like-kind exchange?

In a like-kind exchange, the IRS allows the owners to trade in different kinds of property for a similar kind of property. This is done without immediately incurring tax liability.

  • What happens if you hold the currency?

If you hold cryptocurrency from the taxable activities or either choose to spend or sell it later for more value as compared to when received, you will owe short- or long-term capital gains taxes on the crypto profit. Also based on how the period of holding it.

  • Do I have to pay taxes even if it’s a capital loss?

No! You only owe taxes if you sold or spent the coin and realized a profit. On the other hand, if the coin is sold or spent at a loss, you do not owe any tax on the transaction.

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