Whilst many people make light of the tragic boating accident involving all of bitcoin to vanish suddenly, the overwhelming majority of people are well aware that, as the famous meme goes, “one cannot just refuse to pay taxes.” This essay is targeted at those familiar with the United States tax law since bitcoin is handled from country to jurisdiction. As once IRS decided that electronic money, such as bitcoin, would be treated as “property” rather than “currency,” bitcoin users were obligated to pay taxes on any profits they made from their investments (Check IRS Notice 2014-21, Guidance on Digital Currency, March 25, 2014).
In addition to profits from any exchange or sale, these gains may also include gains from selling that may have been earned upon the acquisition of a product or service with bitcoin (including those Lambos); and gains on the fair market value of any mined bitcoin on the day it was received. It goes without saying that those who are naïve, inexperienced, or thoughtless may find record-keeping to be a significant hardship.
The IRS Form 1040 Schedule D and IRS Form 8949 are used to record profits and losses from the sale of bitcoin or virtual currency, respectively, for people who hold bitcoin as an investment (Sales and Other Dispositions of Capital Assets). When individuals realize bitcoin profits are kept for one year or less, regular tax rates are applied, while capital gains tax rates are applied to those who keep for more than one year. Before we go ahead in our article, register yourself on the the ethereum trader, and learn all there is regarding the safest and easiest ways to trade in the crypto currency such as Bitcoin.
The Importance of Maintaining Records Cannot Be Overstated
Make sure to maintain meticulous records of your bitcoin transactions to ensure that you are on the right side of the law. When you mine or buy bitcoin, you’ll need to keep records of the fair market value of the bitcoin at the time it was purchased or mined, as well as records of the fair market value of the bitcoin when it is used or sold. It will be easier to compute your bitcoin taxes if you have this information handy.
It’s possible that this information isn’t readily accessible. For example, you would get a Form 1099-B if you were purchasing and selling stocks, which would indicate the cost basis of your transaction.. “It has the potential to put you in violation of IRS regulations,” Harris adds. “With the receipt of 1099, you are conditioned to understand that you have a taxable event and what the amount of the taxable gain is. So many individuals are just not receiving information from the exchange in the way in which they are accustomed.”
A Form 1099-K may be produced if you make more than $20,000 in payments and complete more than 200 transactions in a calendar year. However, both requirements must be fulfilled, and many individuals are unlikely to use bitcoin 200 times in a calendar year. Regardless of whether you exceed these limits, you are still liable for tax on any profits.
While avoiding paying taxes on your profits may have been an honest error, don’t expect the Internal Revenue Service to be sympathetic. The government has already filed a lawsuit against at least one cryptocurrency broker to get the data of individuals who may not have properly declared their bitcoin profits.
What You’ll Need to Include on Your Income Tax Return
The Internal Revenue Service (IRS) classifies cryptocurrencies, of which there are many, not only Bitcoin, as a form of virtual money. It does, however, tax this virtual currency as if they were tangible property. In general, you’ll want to keep in mind the following:
- If you sold a cryptocurrency, traded a cryptocurrency, or used a cryptocurrency to buy goods or services, you may be required to declare your profits to the IRS.
- If you sold or spent bitcoin that lost value, you may claim a tax deduction for your losses.
- If you give your bitcoin to a qualified nonprofit organization, you may be able to claim a charitable donation deduction.
- Form 1040 (the federal yearly tax return form) now includes a question on whether you’ve received, sold, transferred, traded, or otherwise obtained a virtual currency as part of your tax return. However, you are not required to respond affirmatively if the sole transactions included purchasing virtual currency with real money.