Do You Need to Pay Taxes on Bitcoin Earnings?
Some may believe bitcoin is an anonymous tax haven. However, that’s not really true: most countries consider bitcoin a taxable asset. That means that yes, you need to pay taxes on bitcoin earnings. Laws vary widely around the world. However, many tax authorities have similar laws to the IRS. The IRS doesn’t view bitcoin as a currency like the USD in your wallet. Instead, it views bitcoin as a capital asset. That ultimately means your bitcoin is subject to capital gains taxes. The IRS has officially adopted this rule, as have the tax organizations of most countries worldwide.
Bitcoin is not a grey area: in most jurisdictions, it’s treated like property. Unless your country has different laws, you can assume your bitcoin holdings are subject to some form of capital gains taxes.
How is Bitcoin Taxed?
Bitcoin isn’t seen as a currency: it’s seen as property. In the eyes of the IRS, you’re completing two transactions every time you buy or sell bitcoins: you’re selling property (your bitcoin), then using the proceeds of that sale to make a purchase. Whenever property is sold, you must report the purchase on your tax form.
That means you need to report every bitcoin transaction on your tax form – including everything from the sandwich you purchased with bitcoin and the time you sold 0.5 BTC for cash.
If your bitcoins have appreciated in price since the date you first purchased them, then your earnings are subject to capital gains tax.
Short-Term Gains Versus Long-Term Gains
Current US tax laws reward patience. That’s why long-term gain is taxed less than short-term gain. Here’s how it might work for a bitcoin investor:
Short-Term Gain: You bought bitcoin for $1,000 in January, then sold it for $5,000 in August 2017. You have a realized gain of $4,000. You held the investment for less than a year, so it’s considered a short-term gain. That means the money is taxed at your tax bracket – 25% on a salary of $75,000 per year.
Long-Term Gain: You bought bitcoin for $400 in January 2016, one year earlier. You sold it for $5,000 in August 2017, giving you a gain of $4600. You’ll pay a tax of 15%, assuming your salary is around $75,000 per year, because you held your investment for more than a year.
In other words, short-term gains are taxed like regular income, while long-term gains are taxed at a lower rate (but still related to your income level).
Use a Service Like Libra
In 2015, only 802 people reported bitcoin profits to the IRS. For 2017 and 2018, that number is going to be significantly higher.
Fortunately, that’s not necessarily a bad thing: you’re not alone. That’s why services like Libra have appeared. Libra is a tax software that connects directly to your online wallet, then provides a spreadsheet of your transactions. You can easily submit that information to the IRS.
Alternatively, you can collect this information yourself.
And yes, you genuinely have to report every transaction made to and from your bitcoin wallet – no matter how large or small. Representatives from Colorado and Arizona have introduced legislation that would limit reporting of purchases to anything above $600 – so this rule could change in the future.
Talk to an Accountant If You Have a Large Amount of Cryptocurrency
If you made a fortune on cryptocurrencies in 2017, then you shouldn’t be reading an online article on bitcoin tax law. Instead, you should be talking to an accountant or other tax specialist. An accountant can walk you through the entire cryptocurrency investing process. Some accountants even accept cryptocurrencies as payment!
Conclusion: Don’t Ignore Tax Laws
It’s easy to ignore tax laws and think they don’t apply to you. Unfortunately, that’s not exactly the case. Remember: you provided KYC/AML verification information when you signed up for a crypto exchange. Furthermore, all bitcoin transactions are publicly recorded on the blockchain, which means a dedicated tax agent could find every transaction made to and from your particular bitcoin wallet. Ignore tax laws and tax authorities at your own peril.