Have you ever owned or used Bitcoin? No matter the amount and how you used or acquired the coins, you may owe your government taxes. Remember, the law stipulates strict penalties on people and corporate entities that don’t pay taxes on Bitcoin. Keep reading for the details you need to know about Bitcoin (BTC) and taxes to be safe from hefty penalties.
Is Bitcoin a Digital Currency? Why is it Taxable then?
In some countries, cryptocurrency is outlawed and, therefore, a non-taxable commodity. However, in the US, it’s taxable.
In 2014, the Internal Revenue Service (IRS) announced that Bitcoin should be treated as property. This declaration may sound inconsequential. However, it’s the legal basis for BTC taxation. It also helps you to know when you need to pay these taxes.
For those who don’t know, Bitcoin is the leading cryptocurrency with over USD 1 trillion market value. Many end-users and merchants around the globe use it as a currency. However, it is not a legal tender in any jurisdiction.
When Should I Pay Taxes on Bitcoin?
Since Bitcoin is a type of property, you must acquire it first before paying taxes on it. You can exchange fiat currency for the asset. You can also exchange other cryptocurrencies like Ethereum (ETH), Tether (USDT), and DASH for it. After this, you can own the property for a given period in a compatible digital wallet and eventually sell it. The price of BTC can increase as you hold it, giving you an added economic advantage. You can trade, give away, or dispose of the coins.
Capital gains taxes can come due at any of these points.
In short, you need to pay taxes on BTC when you:
- Mine Bitcoin: Mining the crypto refers to creating it and getting rewards in BTC in return. It’s the equivalent of acquiring physical property. So, the coins (or part of a single one) become taxable immediately after mining.
- Dispose of Bitcoin: There is a condition here. If you cash the cryptocurrency on an exchange or use it to buy goods and services, you create a tax liability once you make some profit.
Please note that the actual amount of tax also depends on the duration you hold the coins. If you hold it for one year or less, IRS considers it as a short-term gain. If you do so for more than a year, it’s a long-term gain.
Is there any Relief for Bitcoin Tax Payers?
Yes, the law recognizes the cryptocurrency market’s volatility and gives users relief to cushion them from the economic risks. It allows you to deduct capital losses, which often offset capital gains on sales. The huge Bitcoin taxes do not scare seasoned BTC investors due to this provision. They take advantage of the coin’s price fluctuations to reduce their tax obligation. The same thing currently happens in the stock market.
What Happens if You Fail to Pay Bitcoin Taxes?
As already mentioned, the taxation rule governing Bitcoin is not different from other taxable sources of income. The IRS takes stern action on defaulters even if they don’t have adequate knowledge on Bitcoins and taxes.
Here is what the IRS does in case you default:
- Gather more information on your activities: This is relatively easy since BTC is based on a blockchain. In other words, all BTC transactions are permanently stored on its public network.
- You’ll receive a notice: If you neglect this obligation, IRS will charge you interest and penalize you at the rate of about 5% on the unpaid balance.
The agency has numerous enforcement options such as liens against your property and levies on the defaulters’ bank accounts.
The law regards Bitcoins as digital assets or property, so you should pay taxes on the coins. The best way to stay on the right side of the law is to keep accurate and up-to-date records and ensure you understand when you are liable to pay taxes on your Bitcoin.