Bitcoin Taxes Explained
Bitcoin Taxes Explained
- By: Frank Makrides
- Updated on December 8, 2020
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There are many question marks when it comes to Bitcoin Taxes since it’s a fairly new thing in the world of investing (compared to many traditional investments like stocks and real estate) so there is plenty of confusion when it comes to figuring out how it is taxed.
This brings about challenges for both the people investing in Bitcoin as well as the authorities trying to bring about regulations to this cryptocurrency.
Please watch my detailed video below as well in regards to Bitcoin Taxes.
How is Bitcoin taxed?
The U.S IRS is treating bitcoin as an asset, just like a house or stock would be, not as a currency as a lot of Bitcoin traders might think it would be treated as.
Many other counterparts to the IRS around the world agree on this notion too.
So the tax implications are pretty clear when it comes to bitcoin since there are already long-standing rules on how other assets are taxed all throughout the United States.
When is a Bitcoin tax event generated?
Virtual currencies like Bitcoin come with specific tax rules. Please click the link to the IRS website for additional information.
As mentioned, bitcoin is taxed as if it were an asset like a property, but when exactly are you taxed on it?
Well, you will be taxed on Bitcoin (or any other cryptocurrency such as NEO or ETH) when you incur a taxable event.
A taxable event is when you trigger a gain or loss, for whatever reason.
Though this has to be an action which you directly take.
You wouldn’t have to constantly pay tax every time bitcoin changes the price.
Here are the taxable events which have been directly taken from US IRS guidelines published in 2014:
• Trading your cryptocurrency back to fiat (USD, EURO, GBP, etc)
• Trading cryptocurrency to another cryptocurrency
• Using cryptocurrency to pay for goods or services
To understand more details on how Bitcoin works please watch my detailed video below and read my article explaining Bitcoin.
Keep detailed records
To ensure that you are being taxed properly, it is vital that you keep track of all of your cryptocurrency transactions, regardless of how small or large the transaction is.
Every piece of data should be kept.
You should not solely rely on the actual exchanges to track and keep this for you.
As in some cases they only keep this information for a short time or if you’re no longer a user of their exchange, this information may not be readily available to you when you.
As the individual, you’re going to want to keep track of all of your records for yourself, keeping key information such as:
• The type of crypto asset you hold/held
• Date of the transaction
• Bought or sold
• Number of units owned/sold
• Value of the transaction in fiat currency
• The cumulative total of the investment units held
• Bank statements and wallet addresses
The best way to keep track of these things would be to export the data from the exchanges you use as soon and as often as you can so that you can keep everything up to date.
Again, do not rely on these exchanges to keep this information for too long, you should have personal copies on hand in case you ever need them.
Coinbase does a great job in providing good detailed records of Bitcoin transactions. Learn more about Coinbase below.
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I have personally used Coinbase for years. They’ve made the process of purchasing cryptocurrencies extremely simple and seamless. If you’re looking for a reliable and trusted platform to start your journey into cryptocurrency trading, you can’t go wrong with Coinbase. Remember cryptocurrencies are a very risky asset class to invest in, so please do your own research.
Capital gains and losses rules
Capital Gains
A capital gain is what tax law calls the profit you receive when you sell a capital asset, which could be stock or bonds – but in this case, we are of course talking about Bitcoin (or other cryptocurrencies).
There are two different capital gains; short and long-term.
Short-term gains come from the sale of a Bitcoin owned one year or less and are taxed at your maximum tax rate, which could be as high as 37% as of 2020.
Long-term gains come from the sale of bitcoin held for more than one year and are taxed at either 15% or 20% as of 2020 – depending on how much profit was gained.
For example:
If you hold bitcoin for more than a year, you will pay long-term capital gains once you sell it.
You would be paying 15% on any gains when talking about federal taxes unless you were to make a very high amount of profit on the Bitcoin you bought and later sold.
Then you would have to pay 20%.
Though this would only be the case once you hit the $425,800 threshold.
Something a lot of Bitcoin investors probably won’t ever have to worry about.
Capital loses
A capital loss is a loss on the sale of a Bitcoin, the same with capital gains, a capital loss is divided by calendar dates into short and long-term losses.
Loses on your investment are initially used to offset capital gains of the same type.
Any short-term losses on Bitcoin you have are deduced against the short-term gains you might have made, and the same would apply to long-term losses and gains.
How to report your Bitcoin gains and losses
Just like with your other assets, you will need to report your crypto gains and losses to the IRS, in this case, the IRS form 8949.
For each taxable event, as mentioned previously, you’re going to want to calculate any gains or losses that particular transaction made.
Once you’ve filled out the lines on the form with all of your taxable events, you’re going to then want to sum them up and enter your total net gain or loss at the bottom.
Don’t fall into the trap that many Bitcoin investors do;
You MUST report your losses regardless.
Many people believe they only need to report their gains but the IRS is very clear on the fact that you should report all of your cryptocurrency losses on your tax return.
Recommended partners for preparing and filing your Bitcoin taxes
If you want to take on your cryptocurrency tax needs, then look no further than Bitcoin.tax and TurboTax. Start with Bitcoin.tax to organize and calculate your tax records. Bitcoin.tax creates an output file that imports directly into TurboTax, making the process as simple and seamless as possible.
#1 Rated Tax Software
Everyone needs to file their taxes one way or another. So when I want to take on the inevitable, I use TurboTax. It’s fast, simple and there is even a free option. If for some reason you need help, they even offer real CPAs or EAs that can help with advice or a line by line review. I have been using this software for years and I’m happy to recommend it to you.
Special tax free or deferred Bitcoin cases
Owning cryptocurrencies in an individual retirement account (IRA) provides a method to buy, sell and hold cryptocurrencies for your retirement. This can be in either a traditional or Roth style IRA.
IRA retirement accounts provide tax-advantaged investment savings and other benefits. Click here to learn more about investing in an IRA.
How to get Bitcoin exposure in an IRA?
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If you’re looking for a bit of diversification and you a fan of cryptocurrencies, then you need to look into BitcoinIRA. BitcoinIRA as the name says it all, it is the world’s first and still the largest most secure Bitcoin IRA. Invest in Bitcoin and other cryptocurrencies within a retirement IRA. Cryptocurrencies come with a lot of risk, so please do your own research.
Summary
The overall understanding of Bitcoin tax is very clear since it’s treated like any other sort of assets you may own, such as a housing property or a stock.
So doing your tax return is more than easy since you understand how it’s done already.
The only real issue that the IRS has with bitcoin tax is that it is quite hard to find the people that aren’t reporting their capital gains and losses since if you know anything about Bitcoin, you’ll know that it’s quite hard to track and pin it to an individual.
In this case, they mostly rely on your honesty when it comes to reporting your losses and gains on Bitcoin or any other cryptocurrency for that matter.
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Frank Makrides
Is a former financial technology industry executive, licensed realtor, real estate investor, an award-winning speaker, has been published, holds multiple patents and is passionate about all things personal finance and entrepreneurship. He is also a proud husband and father of 2 amazing children.
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