There’s been a lot of questions surrounding taxes on bitcoin however, the Internal Revenue Service (IRS) has made it clear that bitcoin with all other cryptocurrencies is a “property” and so is taxable. Most crypto laws and regulations are vague to a significant number of crypto traders, users, and miners, and the tax law is not an exception.
In fact, many traders have gotten into trouble with the IRS for inadvertently violating tax laws. To trade peacefully and avoid trouble with the government, traders have to understand the laws guiding crypto trading now more than ever.
Traders aren’t the only ones capable of getting into trouble for not paying tax on crypto. Regular people who use bitcoin and other virtual currencies for daily transactions are also at risk and in fact, have unintentionally evaded tax payment.
Here’s a quick breakdown of how this works. The tax law doesn’t apply when you simply buy crypto. Where it does apply is when you make an earning from crypto transactions. For instance, if you buy bitcoin and resell it for a higher amount than how much you bought it, the profit you made is taxable income. What this means is that a lot of people are owing taxes which may have amounted to hefty sums. This is why knowing how to pay taxes on bitcoin trading is extremely important.
When is Bitcoin Taxed?
To spell it out, bitcoin is taxed when you:
- Trade it to another virtual currency
- Trade it to a fiat currency
- Receive it as a gift or any form of compensation
Reporting Crypto Income Earnings
When it comes to staying out of trouble with the IRS, transparency is key. Make sure everything is reported accurately without trying to play smart because they will know when something is amiss. To report your earnings on crypto, you must fill out the 8949 form which is used to report all the transactions done with assets to the IRS.
Capital gains and loss reports are also required and to file those, you will need to fill out the Schedule D form. You should make sure you report your losses, as well as this, can help you write off up to $3,000 worth of tax. Accurate recordings in your reports are crucial in avoiding any hassles with the IRS so, be sure to double-check your numbers.
Tracking Your Crypto Activities
Getting into the crypto space has become quite easy as bitcoin and other virtual currencies are now easily accessible. That said, it is your responsibility to keep track of every single transaction you make with cryptos that are taxable. This act will save you a lot of headaches when it is tax season.
Things may get serious if your reports do not tally with those of the IRS. For one, they may assume the transactions omitted were intentional and punish you for tax evasion. For users who only buy bitcoin and leave it in their wallet to appreciate, generating reports will be easy, however, for those who do a lot of transactions including those with private wallets, a lot of work and diligence needs to go into tracking all such dealings.
Tax software programs designed for crypto trading and transactions like CoinTracker, CryptoTrader.Tax and TokenTax tremendously help in keeping tabs on your dealings and calculating capital gains and losses. Click here to learn more about tax software programs.
Paying Your Bitcoin Taxes
Tax season is always hectic and draining for those people who wait till it is just around the corner before beginning to figure out what they owe. The best way is to follow up every month and get your numbers down. That way, when it is time to file your taxes, everything is in place and the chances of getting your numbers wrong will be significantly lower.
Payment is now very convenient as it can be done online from the comfort of your home. All you need to do is go on the IRS website and create an account. The instructions here are simple to follow and you really shouldn’t have any issues. Just be sure to make those payments before the deadline as late payments do attract penalties like interest.
Minimizing Bitcoin Tax Payment
Taxes on bitcoin transactions can add up to hefty sums for people who trade and transact a lot with them. One way to avoid this is to buy and hold bitcoin for more than a year as you can save more on bitcoin taxes when you hold them for a longer period of time without actually trading them.
This is especially rewarding for low-to-medium income earners because tax rates on long-term capital gains are 0%. So, if you’re single and have an annual income of under $40, 000 or married with an annual income of under $80, 000 you will essentially pay zero tax for buying and holding bitcoin.
Conclusion
Miners are not exempted from paying tax even though they acquire them without payment or any form of exchange. According to the Internal Revenue Service, mined coins are taxable depending on their value at the time they were mined.
Crypto companies sometimes give free cryptocurrencies for promotional purposes. This is called an “airdrop”. To receive an airdrop, users must submit their wallet addresses in advance. The cryptocurrency is then deposited on the stipulated date. The IRS also treats airdrops as taxable income and so, people that receive them should not do this as well.
Dealing with taxes is usually very confusing for a lot of people therefore to get it done right and without much headache, you should consider working with a professional. There are tax accountants that specialize in cryptocurrencies that you can hire to take care of all your crypto tax dealings.
