Understanding Bitcoin Taxes: What You Need to Know Before Investing


Bitcoin and other cryptocurrencies have been among the most popular investment trends over the last few years. The latest statistics show that as many as 14 percent of Americans hold crypto in their portfolios.

However, many investors dive into Bitcoin investing without knowing the tax implications. In 2019, the Internal Revenue Service (IRS) announced that it would send letters to over 10,000 taxpayers who could not have reported bitcoin transactions in the prior tax year.

Before investing in Bitcoin or any other investment, you must know the taxes you may be required to pay.


Understanding Bitcoin Taxes: What You Need to Know Before Investing

Bitcoin and other cryptocurrencies are now among the most popular investment trends in recent years. The latest research shows that as much as 14 percent of Americans have cryptocurrency in their portfolio.

Many people plunge into Bitcoin investing without understanding the tax implications. In 2019, the Internal Revenue Service (IRS) announced that it would send letters to over 10,000 taxpayers who could not have reported bitcoin transactions in the prior tax year.

Before investing in Bitcoin — or any other investment for that matter, it is crucial to know precisely the taxes you may be liable to.

Cryptocurrencies are Property

In 2014 The IRS issued an announcement clarifying that, for taxes, Bitcoin and other virtual currencies will be considered property, not money. Its IRS term of a virtual cryptocurrency can be described as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”

What does this mean in terms of taxation?

In essence, it means that Bitcoin transactions will be taxed just like other property types like bonds, stocks, real estate, and much more. Due to this classification, Bitcoin investors may be subject to capital gains tax.

Bitcoin Transactions

The IRS demands that you pay tax on Bitcoin transactions, the same way you would with transactions that involve any other precious asset. Taxable Bitcoin instances include:

  • Receiving the mined Bitcoin
  • Selling Bitcoin
  • Use Bitcoin to purchase goods and services
  • Utilizing Bitcoin to buy a different cryptocurrency
  • Payments are made using Bitcoin
  • Receiving Bitcoin benefits

It is essential to keep the records of all Bitcoin transactions you make throughout the year to report them correctly for tax purposes. If you are required to register Bitcoin payments, it may be best to employ an accountant to help you prepare your taxes to ensure all information is correct.

Paying Taxes on Bitcoin

Capital gains taxes are the most frequent taxes you will be required to pay for your Bitcoin transactions. These are due if you decide to sell your asset at more than the price you paid. Also, they apply when you utilize your Bitcoin to purchase a new product or service. The IRS has stated that cryptocurrencies like Bitcoin are considered property, not a form of currency.

The type of capital gain tax you pay depends on how long you’ve held your Bitcoin before selling. If you store the Bitcoin longer than one year and later sell it at a higher price, that’s an unintentional capital gain, and you’ll be taxed at the usual tax rate for income.

If you store your Bitcoin for longer than one year and then sell it for an income, You’ll be subject to capital gains taxes for the duration of your investment. The rates for capital gains tax vary between zero to 20 percent depending on your household’s income.

Although most Bitcoin transactions will be considered capital gain, there are exceptions. For instance, any Bitcoin used as a reward or payment is considered income. You’ll get a form 1099 and have to report the profits to the IRS.

Be aware that even if you don’t get a receipt for every Bitcoin transaction, it is possible that you could be liable for tax. Therefore, you must employ an accountant who knows about the tax consequences of Bitcoin and other cryptocurrencies.

Deducting Losses

There’s a bright side to Bitcoin investors. Like your gains, which are tax-deductible, the losses you make could also be tax-deductible.

First, any losses that you experience directly offset the capital gains. Let’s say you’ve made the Bitcoin transaction that results in an investment of $1,000. In normal circumstances, you have to pay capital gains tax for these gains. If, however, you were to have another Bitcoin transaction that resulted in the loss of $1,000that is, you were able to sell your Bitcoin at a price that was less than the $1,000 you paid for, this loss would be offset by the gains. Your failures and profits will be equal, so you’d get no tax-deductible income.

You can not only use Bitcoin losses to reduce any gains you made. However, you can also declare a net loss of up to $3000 to deduct tax. For example, suppose you completed one Bitcoin transaction that yielded a profit of $1,000. In another transaction, however, you suffered a loss of $4,000. Not only does the loss erase the gain, but you also decrease your tax-deductible income by $3,000, which means you’ll be paying less.

If you’ve suffered any losses in the capital on any of your Bitcoin transactions, then you’ll be required to report these on the Schedule D of Form 1040.

What Happens If You Don’t Pay?

Failure to pay taxes, whether about or about Bitcoin gains or any other, could have serious consequences. The IRS is liable for penalties for various reasons, including the failure to:

  • Filing your tax return in time
  • Make sure you pay your taxes on time
  • Make sure you include accurate information on your tax return

A penalty for giving inaccurate details in your tax returns will be 20% of your tax-delinquent amount. Penalties for not paying your tax debt is 0.5 percent per month, with a maximum penalty of 25% of the taxes that are not paid. If you fail to pay both penalties, you could be liable to interest on the unpaid amount and penalties.

If you fail to pay what you have to pay, the IRS may issue a tax lien against your property, including personal property, real estate, and financial assets.

It is also important to remember that you will not be penalized if you fail to be able to pay Bitcoin taxes. First, IRS penalties apply regardless of whether or not your mistake was deliberate. In addition, because the transactions made with Bitcoin are open to the public, You shouldn’t think that the IRS isn’t aware of your investment activities.

In failing to declare your Bitcoin gains, You’re increasing the likelihood of being subject to An IRS investigation.

Next Steps

The best way to prepare for tax time is to keep detailed logs of all your Bitcoin transactions. Even if you do not receive taxes from any platform where the trade takes place, it’s crucial to keep track of precisely how much you’ve invested, gained, and lost during the course of the year. As tax time approaches, you should hand the records to your accountant.