A Brief Guide To Bitcoin Tax And Capital Gains

Bitcoin is finally being taken seriously; it is no longer seen as a novelty that hackers explore in their free time. That means cryptocurrency brokers and investors are also beginning to receive more and more attention from accountants and tax administrators. Omissions in reporting taxes for Bitcoin can lead to criticisms and a poor response from the Internal Revenue Service (IRS). If you’ve invested in Bitcoin and are worried about taxes, here are some guidelines and laws you should know.

Do You Pay Tax On Bitcoin?

If you hold bitcoin for more than a year, you only pay long term capital gains tax when you sell. 

Taxes Paid Under Bitcoin in the United States

There are several situations you’ll have to pay taxes on income from Bitcoin.

The first is if you are treating Bitcoin as an investment vehicle. You would not have to pay taxes on Bitcoin if you simply bought and held it over a year or if you lost money on your investment.

Capital Gains Tax On Bitcoin

If you bought Bitcoin and sold it for a profit during the year, you would have to pay capital gains tax. The capital gains rate is less than the rate on income.

The second case is if you accepted payment for work in Bitcoin. If you have a for sale by owner home (FSBO listings), you may be eligible for more Tax savings by listing your home mortgage for sale with Bitcoin.

Taxes For Bitcoin Elsewhere

Capital gains tax rates vary depending on your income. In Canada, the income tax rate ranges from zero to 33 percent. The federal structure shows that income tax rates in Canadian provinces are all above ten percent. The Canadian capital gains tax rate is taxed on the first 50 percent of capital gains.

Other countries have income tax rates ranging from zero to over 60 percent.

Paperwork And Process For Taxes On Bitcoin

  1. If you received Bitcoin through your employer, they would have to file a W-2 that showed how much they paid you and how much they withheld. The withholding process would have to happen on the converted value of your Bitcoin. You would have to file your taxes with the IRS, note your income from Bitcoin, and then pay taxes based on that income minus withholdings and deductions.
  2. You have to convert your Bitcoin into dollars before paying taxes. If you received Bitcoin as part of your income as an independent contractor or self-employed individual, you would have to file a 1099 miscellaneous form and then pay taxes on your income.

Minimizing Your Tax Burden

One of these is through retirement planning and spending. An individual can take some of their earnings from Bitcoin over a tax year and deposit into an individual retirement account (IRA) of some kind. These funds will be tax-deferred and will receive preferential tax treatment.

You can also reduce their tax burden by claiming Bitcoin losses for a deduction i.e. a tax debt firm. Sales for a loss cannot be claimed if they occurred between family members. A loss may also be suspect if it is claimed for a new and untried cryptocurrency. Claiming large losses for a Bitcoin alternative that does not have much of a reputation can invite an audit from the IRS. An individual would have to prove that their investment was legitimate and not simply a tax shelter. A legitimate tax debt company can help you minimize your tax burden when it comes time to file your taxes.

As the cryptocurrency grows in prominence, new tax laws, solutions, and rules will be written surrounding its status as a currency and investment vehicle. However, until those rules are written, taxpayers have to treat the cryptocurrency as either income or capital gains and file their taxes accordingly.