Cryptocurrency Taxes: How Much Bitcoin is Taxed and What Are Your Responsibilities?
Vytautas Zabulis, Co-Founder & Managing Director of HODL Finance shares insights regarding cryptocurrency taxes.
On September 7, finance ministers from the European Union met in Vienna to discuss the volatile nature of digital assets. Their, but also other politicians’ concern about cryptocurrencies is in regard to crypto’s general lack of transparency and their potential to get misused by black marketers.
Cryptocurrencies started out as a new, decentralized way of paying for goods.
Until very recently, this meant that Bitcoin and other cryptocurrencies were not subject to any official regulation that applied to fiat currencies. Not being backed by any government, bank, or financial system, the digital money existed in a limbo created by high-powered hardware and persistent miners.
No IRS, no taxes, no accountability.
Bitcoin shortly became synonymous with hassle-free trade, but also with illegal deals.
Regardless of whether black marketers are the ones to blame, the legal system now treats cryptocurrencies as any other asset. This implies taxability too, as one of regulations enforced by the US Internal Revenue Service and its counterparts throughout the world.
The truth is, it was only a matter of time.
To pay with Bitcoin, you now must pay for Bitcoin first.
Here’s what it means, and how much it costs.
How Are Cryptocurrencies Taxed in the First Place?
Cryptocurrencies are still as decentralized as currencies can be, which means that IRS and similar institutions recognize that they are not being issued by any country or central bank. This is why cryptocurrencies cannot be treated as money, nor can they be taxed in the same way as fiat currencies.
But, they can and are taxed as assets.
With cryptocurrencies making their owners solvent, but still not being equivalent to money, they cannot be treated as anything but intangible properties. This applies to every type of crypto and any amount, regardless of whether you’re buying or selling them, and especially if you use them as money.
Here’s a list of taxable crypto activities:
● If you’re selling personally mined Bitcoins to a third party, your Bitcoins are taxable.
● If you’re reselling your Bitcoins, they are once again taxable.
● If you’re paying for goods and services with any kind of Bitcoins, they are taxable.
● If you’re investing in something with any kind of Bitcoins, yes, they are taxable.
What Are Your Responsibilities as a Crypto Taxpayer?
Your responsibilities as a crypto taxpayer depend on whether you’re a crypto miner as well.
If you’re selling cryptocurrencies that you’ve mined yourself, or if you’re using personally mined cryptocurrencies to pay for goods and services, then these new regulations issued by the likeness of IRS legally oblige you to report your transactions and be taxed for either personal or business income.
If, on the other hand, you’re reselling your cryptocurrencies, or if you’re paying for goods and services with a cryptocurrency that you’ve previously bought from somebody else, then you are legally obliged to pay capital gains tax, since the IRS and others treat these cryptocurrencies as investments in assets.
How Much Do These Taxes on Cryptocurrencies Cost?
In case you’re being taxed for personal or business income, you must report every fiat currency revenue that you get for selling your personally mined cryptocurrencies, in full amount. So, if you mine a single Bitcoin and sell it for $250, that’s the exact amount you must report as your taxable income.
Luckily, mining expenses, such as the cost of computer hardware or electricity, are deductible.
In case you’re being taxed for capital gains, the amount of money you’ll have to pay depends on how long the cryptocurrency was in your possession in between the moment you bought it and the moment you sold it or used it to pay for goods and services. The math is a bit more complex here.
Let’s say you’ve bought a Bitcoin for $250 and sold it for $300 in less than a year. In this case, you’ll be taxed for short-term capital gains on the $50 you’ve earned in the meantime, at the rate equivalent to the ordinary income tax rate. So, if the holding period is less than a year, you’re paying income tax.
But, if your holding period is longer than a year, then these $50 that you’ve earned in the meantime will attract long-term capital gains tax, which is calculated at a rate lower than the ordinary income tax rate. Bear in mind that this long-term capital gains crypto tax comes with limited tax deductions.
How can something as volatile as cryptocurrency be taxable at a steady rate, you ask? The IRS has obviously found a way, which is why you need to track your crypto assets with great precision. Be consistent in your reporting, and use LIFO or FIFO accounting methods to reduce your tax obligations.
Alternative – crypto-backed loans
A handy alternative to selling crypto-assets is crypto-backed loans that share these qualities because they are:
Safe: crypto securely stored according to highest standards
Available 24/7: automatically calculated without credit checks
Fast: loans issued instantly
Exempt from tax: differently than selling, borrowing is not taxed
Please note: This article is not a financial nor tax advice. Cryptovibes.com does not endorse any descisions. Readers should do their own research before investing funds in any financial asset or attending any presented event. We are not responsible for any profit / loss your descisions might lead to.
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