Fri. Jun 21st, 2024
what you need to know about Bitcoin

After a brief rise in 2017, Bitcoin surged again in late 2020, closing the year with a single coin worth just under $30,000. 

Many investors were enticed to invest in Bitcoin for the first time, while others who had been hanging onto their bitcoin for some time taking advantage of the token’s skyrocketing price to profit from part of their holdings.

Apart from the fact that Bitcoin has transformed many from rags to riches, there’s one aspect of the most popular cryptocurrency that is very little talked about- the tax on Bitcoin!

This article will provide valuable insight into the taxability of Bitcoin and various other sides of it.

Tax Rules By The IRS

Whether you are selling or exchanging cryptocurrencies or using virtual currencies, to pay for goods or services, or holding virtual currencies as an investment, there might be some tax implications.

This is because the IRS considers Bitcoin and other cryptocurrencies as property and not currency. Simply put, this means that cryptocurrency will be taxed similar to stocks, bonds, and other assets.

The Internal Revenue Service (IRS) released IRS Notice 2014-21, IRB 2014-16, providing guidance for individuals and companies on the tax treatment of virtual currency transactions.

The IRS has also mentioned that certain crypto transactions will qualify as capital gains taxes, while some will be subjected to income taxes. On the other hand, it is also mandatory to report any crypto loss that you incur when filing taxes.

Selling Part Of Your Bitcoin Holdings

Selling all or even a part of your Bitcoin holdings will be subjected to taxation, and the tax rate will depend on the two deciding factors of tax rate calculation, namely holding period and whether you incurred a loss or a profit. According to the holding period, there are two types of crypto taxes:

  • Short-term capital gains tax
  • Long-term capital gains tax

When you hold your assets for longer than a year before selling them, the profits you earn on the assets are subjected to long-term capital gains tax. Long-term capital gains range from 0% to 20%, depending on your income.

Tax rate Single filer Married filing jointly Married filing separately Head of household
0% $0 to $40,400 $0 to $80,800 $0 to $40,400 $0 to $54,100
15% $40,401 to $445,850 $80,801 to $501,600 $40,401 to $250,800 $54,101 to $473,750
20% $445,851 or more $501,601 or more $250,801 or more $473,751 or more

 

Short-term capital gains are taxed similar to ordinary income and the tax rate ranges from 10% to 37%. These assets are held for less than 12 months.

 

Tax rate Single filer Married filing jointly Married filing separately Head of household
10% $0 to $9,950 $0 to $19,900 $0 to $9,950 $0 to $14,200
12% $9,951 to $40,525 $19,901 to $81,050 $9,951 to $40,525 $14,201 to $54,200
22% $40,526 to $86,375 $81,051 to $172,750 $40,526 to $86,375 $54,201 to $86,350
24% $86,376 to $164,925 $172,751 to $329,850 $86,376 to $164,925 $86,351 to $164,900
32% $164,926 to $209,425 $329,851 to $418,850 $164,926 to $209,425 $164,901 to $209,400
35% $209,426 to $523,600 $418,851 to $628,300 $209,426 to $314,150 $209,401 to $523,600
37% $523,601 and up $628,301 and up $314,151 and up $523,601 and above

 

In this aspect, it must be noted that the tax on these transactions can be categorized as either capital gains taxes or as income taxes.

Here’s an overview of tax-related events:

  • Getting paid interest on decentralized financing loans
  • Receiving cryptocurrency with an airdrop
  • Payment for completing assignments and bug bounties
  • Profits from staking and liquidity pools
  • Crypto mining transaction costs and block rewards

Buying Goods And Services Using Bitcoin

In the perspective of the IRS, spending your bitcoin isn’t all that different from selling it, especially if the value of your holding has substantially grown since you originally acquired it. The official website of the Internal Revenue Service states that whenever you use Bitcoin to buy goods or services, there will be tax repercussions.

For instance, if you bought Bitcoin worth $700 two years ago, and purchased a Tesla for $50,000 in 2021, you’ll have to report your capital gains on the transaction.

Reporting Bitcoin Taxes

All the crypto transactions that either trigger capital gains or income taxes must be reported. 

Capital gains and losses must be calculated in accordance with IRS forms and instructions. This includes:

  • Form 8949, Sales and Other Dispositions of Capital Assets
  • Form 1040 Schedule D, Capital Gains, and Losses.

Ordinary income must be reported in the following:

  • Form 1040, U.S. Individual Tax Return
  • Form 1040-SS
  • Form 1040-NR
  • Form 1040, Schedule 1, Additional Income and Adjustments to Income

The Bottom Line

Calculating taxes can be a bummer, but with the right resources, you can make it easy. Always keep a record of all the transactions you’re making, including date, fair value price at the time Bitcoin is acquired and sold- this will help you calculate your taxes in a seamless manner.

FAQs

  • Do you owe taxes on Bitcoin?

Yes, Bitcoin transactions are taxable.  The IRS considers Bitcoin and other cryptocurrencies as property and not currency. Simply put, this means that cryptocurrency will be taxed similar to stocks, bonds, and other assets.

  • What are long-term capital gains?

When you hold your assets for longer than a year before selling them, the profits you earn on the assets are subjected to long-term capital gains tax. Long-term capital gains range from 0% to 20%, depending on your income.

  • What are short-term capital gains?

Short-term capital gains are taxed similar to ordinary income and the tax rate ranges from 10% to 37%. These assets are held for less than 12 months.

  • Are Bitcoin mining rewards taxable?

Yes, Bitcoin mining rewards are subjected to income taxes.

  • How to report capital gains tax?

Capital gains and losses must be calculated in accordance with IRS forms and instructions. This includes:

  • Form 8949, Sales and Other Dispositions of Capital Assets
  • Form 1040 Schedule D, Capital Gains, and Losses.

By admin