Did you know that the first-ever transaction involving Bitcoin was a Pizza purchase? Yes, in May 2010, two Pizzas were bought with 10,000 BTC, and if we put it in today’s price, the pizzas would be worth millions of dollars.
We are mentioning this fact because just think about the taxes you’d have to pay if you spent millions of dollars. Even if you sell Bitcoin and do not spend it on anything, you’d have to pay taxes because the IRS looks at cryptocurrencies as property for taxation purposes. Other than this, if you convert your Bitcoin to U.S. dollars by selling, mining, or using Bitcoin, you have to report your Bitcoin transactions.
In this guide, we will take a deeper dive into how bitcoin is taxed. Let’s get started.
How Is Bitcoin Taxed?
Bitcoin can be taxed in various ways. Here, we’ll explore a few of them.
1. How Did You Acquire Bitcoin?
If you sell your Bitcoin for a profit, you are liable to pay taxes on the difference between the sale proceeds and the purchase price. This is also applicable for exchanging Bitcoin for other cryptocurrencies and buying goods and services using Bitcoin.
If you mine Bitcoin or receive it as payment in exchange for goods and services, it is considered earned income and valued as taxes immediately. Moreover, if you sold Bitcoin or used it to buy things, you’ll owe taxes if the value increased from when you got it. This might be taxed as a capital gain, either short-term or long-term.
2. Factors Affecting Bitcoin Tax Rate
Basically, two factors affect the taxes on buying and selling Bitcoin for profit.
- The Duration: If you sell or trade the Bitcoin before one year, it will be considered as short-term capital gains. This means that you have to pay higher taxes between 10-37 per cent. If you hold it for more than a year, it will be considered as long-term capital gains, and your tax rates will be between 0-20 per cent.
- Total Income: If your income is high, you are liable to pay higher taxes. The amount of money you earn throughout the year determines your total income and, hence, the taxes as well.
IRS Provides Necessary Paperwork
It would be best if you tracked your gains and losses from cryptocurrency transactions. The IRS now asks on tax forms if you received or sold any digital assets during the year. If you only bought cryptocurrency with regular money and didn’t do anything else with it, you can say “no” to this question. For example, if all you did was buy Bitcoin with U.S. dollars in 2023 and didn’t sell or buy anything else with it, you can answer “no” to the IRS question.
To follow the rules, keep good records.
- Please keep track of what your Bitcoin was worth when you got it and when you used or sold it.
- You might get a Form 1099-K if you make over $20,000 or have more than 200 transactions in a year. But even if you don’t, you still have to pay taxes on any gains.
Write off Bitcoin Losses
Bitcoin saw some of the most significant dips in the last couple of years. However, it bounced back in late 2023. If you faced losses during the low times, you can still recover your losses. You can use a strategy known as tax-loss harvesting.
You can declare your losses on tax returns, and this process is similar to declaring your losses on bond or stock sales. However, there’s a limit to what you can write off, which is $3,000.
One more difference between stock losses and Bitcoin losses is that Bitcoin is exempt from the wash-sale rule. This rule stops traders from selling the stock for a loss, getting the tax break and then repurchasing it immediately. While this rule works on stocks, Bitcoin is exempt from this rule. Bitcoin traders can immediately repurchase it. Be that as it may, this loophole could close in the future with the reintroduction of the Lummis-Gillibrand Responsible Financial Innovation Act.
Concluding Thoughts
Reporting your Bitcoin taxes is absolutely important for investors and traders. It is even more critical to understand your Bitcoin taxes. In this guide, we explained Bitcoin taxes briefly. The taxpayer must keep good records of the transactions, understand and know cryptocurrency tax rules, and stay updated on them as well. The taxpayers have to stay proactive in the ever-evolving crypto tax landscape.
FAQs
- How much tax do I pay on Bitcoin?
The tax you pay when buying and selling Bitcoin depends on two key factors. Firstly, how long you hold onto the Bitcoin affects the tax rate. If you sell within a year, you’ll face higher taxes (10-37%), while holding for over a year leads to lower taxes (0-20%). Secondly, your total income for the year determines your tax rate as well. Higher-income means higher taxes, as your earnings dictate your tax bracket.
- Is income from Bitcoin taxable?
Yes, income from Bitcoin is taxable. This includes earnings from activities like mining, trading, or receiving it as payment for goods or services. It’s treated as property for tax purposes, so you must report it on your tax returns and keep records of your transactions.
