Governments are
increasingly concerned about how to tax cryptocurrencies, notably Bitcoin, as
they grow in popularity and influence in the financial world. In the United
States, the Internal Revenue Service (IRS) has issued instructions for
reporting bitcoin transactions and ensuring tax compliance.
Cryptocurrency
as a kind of property
The IRS
considers cryptocurrencies such as Bitcoin to be property rather than cash.
This classification has major ramifications for taxation. It is a taxable event
when you use Bitcoin to make purchases or swap it for other cryptocurrencies,
goods, or services. This means that you must record any gains or losses on your
tax return.
Cryptocurrency
Transaction Reporting
The requirement
to register all cryptocurrency transactions is a crucial feature of
cryptocurrency taxation. This includes the purchase, sale, trading, and use of
bitcoin for any reason. It is critical to keep accurate records of these
transactions, including dates, quantities, the counterparty engaged, and the
current fair market value of Bitcoin.
Taxable
Occurrences
Several events
cause Bitcoin owners to incur tax liabilities:
- When you trade Bitcoin for fiat currency
(such as USD), you realize a capital gain or loss. The amount subject to
taxation is determined by the difference between the sale price and your
original purchase price. - Exchanging Bitcoin: It is also taxed to
exchange Bitcoin for another cryptocurrency or to use it to purchase goods or
services. The IRS views this to be the same as selling the Bitcoin for its fair
market value in USD. - Mining Bitcoin: Miners that receive Bitcoin
as a reward for confirming transactions must disclose the cryptocurrency’s fair
market value as taxable income. - Bitcoin as Income: If you get Bitcoin as
payment for services or as part of your salary, it is considered regular income
and must be reported at its fair market value. - Gifts and Inheritance: Receiving Bitcoin as
a gift or inheritance has tax consequences. The estate of the donor or deceased
person may be subject to gift or estate taxes, and the recipient may be
required to pay taxes when selling or exchanging the gifted or inherited
Bitcoin.
Capital Gains
and Losses Calculation
Calculating
capital gains or losses from Bitcoin transactions for people entails removing
the cost basis from the proceeds. The cost basis is usually the original
purchase price, although it can be changed to account for items such as fees
and other acquisition…
