Bitcoin is the hottest new thing out there right now, but that doesn’t mean that it’s exempt from taxes. The IRS has been clear on its stance in regards to taxes on Bitcoin: you need to pay taxes on anything that can be taxed. This guide will detail when and how you should report your Bitcoin earnings and what types of investments are taxable.
Taxes on Bitcoin
The IRS categorizes virtual currencies as property, their capital gains is taxable — basically, how much value your holdings gained or lost in a given period.
What is Capital Gains Tax and How Much is it?
Capital gains tax works exactly the way that it sounds — a tax for any capital gain that you made during the year. If you sold anything during the year (for example, Bitcoin), then you would pay capital gains tax for any money that was gained from selling it.
Capital gains are only realized when Bitcoin is sold. This means that if your investment grows in value but you do not sell you will not owe tax. However, if you use Bitcoin to make a payment, purchase, or even gamble at a site such as https://bitcoin.casino/, this transaction will cause your profits to be realized.
There are two ways to calculate capital gains: short-term and long-term. Short-term is anything less than a year; long-term is more than one year. The difference between the two is simple — the rate that you pay your taxes at.
For the short-term, you pay your taxes at whatever your tax rate is (for example, if you are in a 25% tax bracket, there would be a 25% capital gains tax on any gains from selling if they were short term). Long-term has a special capital gains rate of 15%.
How Much Will I Owe?
The first thing that you need to do is figure out what your capital gains are for the year. To do this, you will need:
The fair market value of your Bitcoins at the time of purchase; The fair market value of your Bitcoins at the time of sale; How much you paid for your Bitcoins (you can deduct expenses related to buying such as fees from an exchange).
Next, you need to calculate what the capital gains are for each individual Bitcoin. You will first figure out how much money was made on each coin by taking the portion of Bitcoin bought minus the portion sold. Then subtract the fair market value of Bitcoin when you bought it from that portion.
The current price of Bitcoin is $32,240 USD. Let’s you bought 0.32 Bitcoin for $10,000. If the price rises to $40,000 USD your investment will have grown from $10,000 USD to $12,800 USD.
This means your total gain is $2,800 USD. This is the capital gains amount that is taxable. If you sell your Bitcoin for a loss you will not owe any taxes.
Paying Taxes On Your Bitcoin
The IRS notifies over 10,000 Bitcoin holders every year chasing unpaid taxes. It is important you understand your tax obligation. If you transacted with Bitcoin this year you will probably owe taxes. If you found this post useful check out the rest of our blog.