Bitcoin Tax Tips: Tax Tips For Bitcoin And Other Virtual Currency
Bitcoin and other virtual currencies come under the purview of the Internal Revenue Service (IRS). In Notice 2014-21 of the IRS, it was specifically mentioned that cryptocurrency is not to be treated as currency. Rather, it is taxed as property.
In this article, we will learn about the various Bitcoin tax and some important tax tips that’ll help you stay ahead of others in preparing for the tax season.
Bitcoin Taxes
Some crypto activities are taxable, while others are not. Among the ones that are taxable, the IRS has clearly mentioned which of these events are income tax events and which are capital gains tax events.
Taxable Events
- Cashing out crypto for fiat currency
- Buying goods and services using crypto
- Swapping one crypto for another
- Accepting crypto that has been mined or forked
Non-Taxable Events
- Purchasing crypto using fiat currency
- Donating crypto to a non-profit or charity
- Gifting crypto (up to a certain amount)
- Crypto transfers between wallets
Now, let’s look at a few taxable events that are taxed as income taxes and capital gains taxes.
Ordinary Taxes
When Bitcoin is not a capital asset, ordinary income taxes apply. A merchant that accepts Bitcoin, or a consultant paid in Bitcoin, for example, would record any profits as regular income.
Capital Gains Taxes
When Bitcoin is kept as a capital asset, such as a stock or bond, capital gains taxes apply. For example, if an investor feels Bitcoin prices will climb, he or she may have acquired Bitcoin a few years ago and sold it for a profit.
Bitcoin Taxed As Income
The following activities are subjected to income taxes:
- DeFi lending interests
- Receiving cryptocurrency through an airdrop
- Receiving cryptocurrency rewards and bonuses for completing a task
- Earn cryptocurrency through staking and liquidity pools
- Earn money from crypto mining through transaction fees and block rewards
Bitcoin Taxed As Capital Gains
The following activities are subjected to capital gains taxes:
- Selling off crypto like Bitcoin, Ethereum, etc., for fiat currency
- Buying goods and services using cryptos, such as a Tesla or even a pizza
- Trading one crypto for another coin
Bitcoin Tax Tips For Reporting Taxes
Here are some of the tax tips that you can make use of to keep yourself ready for the tax season
1. Maintain a record of all your crypto transactions.
You'll need to keep track of the fair market value of your bitcoin and all other virtual currencies when they were mined or acquired. Apart from all this, you should also note the fair market value of the same when you used or sold it. Another important thing to take note of is to keep track of the dates of the transactions. This information will help you figure out how much bitcoin tax you owe.
2. Organize your tax paperwork
Spend some time arranging your tax paperwork and financial data to make the filing process go more quickly and smoothly. Use your past year's tax return as a starting point to establish your previous income, deductions, and credits.
3. Determine if you want to get help from a cryptocurrency CPA or do it yourself
A CPA is a trusted financial agent who advises businesses, individuals, and other institutions to prepare for and achieve their financial targets. When you use ZenLedger for reporting your taxes, you can take help from a professional accountant who will help you with your taxes.
The Bottom Line
Bitcoin values have fluctuated significantly throughout the years, generating large profits and losses for investors. Simultaneously, the IRS and SEC have increased their enforcement measures to ensure that crypto firms follow the regulations and that crypto investors pay their due amount.
Even though filing and reporting taxes can sound like a complicated process for many investors, crypto tax software like ZenLedger makes it easy for you to simplify the process.
ZenLedger easily calculates your bitcoin taxes and also finds opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional prepared plans!
Disclaimer: This material has been prepared for informational purposes only and is not intended to provide, tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
FAQs
How is crypto taxed?
Bitcoin and other virtual currencies come under the purview of the Internal Revenue Service (IRS). In Notice 2014-21 of the IRS, it was specifically mentioned that cryptocurrency is not to be treated as currency. Rather, it is taxed as property.
Some crypto activities are taxable, while others are not. Among the ones that are taxable, the IRS has clearly mentioned which of these events are income tax events and which are capital gains tax events.
Can the IRS track Bitcoins?
Yes, the IRS can track Bitcoin! The IRS is notified of reportable cryptocurrency transactions using a "matching" mechanism included in the IRS Information Reporting Program (IRP). This simply means that if you obtain a Form 1099-K or Form 1099-B from a crypto exchange, the IRS knows you have reportable cryptocurrency transactions.
Do I have to pay taxes if I am a Bitcoin miner?
Yes, in the United States, mining cryptocurrency is considered a taxable event. The Bitcoin miner considers the fair market value at the time of mining to be his or her revenue. It is also worth mentioning that you can deduct resources and equipment used to mine Bitcoin as your business expense.
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