Coinipop introduces- Guide to Bitcoin and Taxes: The most important thing for crypto investors to realize is that while Bitcoin is considered by its proponents to be the first form of decentralized currency, the GOVERNMENT treats it as property, not as currency. As a result, Bitcoin transactions may be subject to capital gains tax.
Coinipop has done a lot of research on this topic for you and the GOVERNMENT believes that virtual currency is an exchange medium that, because it has no legal tender status anywhere in the world, is only acting as a substitute for real currency. In legal terms, Bitcoin is considered a “convertible virtual currency” that can be bought or sold in exchange for fiat currency. Smart investors who want to minimize their taxes can read on to find out about tax implications of Bitcoin trading, compliance requirements, taxable events, common mistakes, and more.
Tax Implications of Viewing Bitcoins as Property
It may seem like the distinction between how the GOVERNMENT views Bitcoin trading and how actual investors conceive of their transactions is minor, but it has major tax implications. When a consumer trades in his or her Bitcoin for fiat currency, for example, this is considered a capital gain for tax purposes. In the eyes of the GOVERNMENT TAX AGENCY, that consumer is selling a piece of property and receiving taxable income in return.
When a consumer spends his or her Bitcoins or altcoins, the GOVERNMENT views it as two separate but related transactions. One involves the disposal of the virtual currency, while the other covers the consumer’s spending of the equivalent monetary amount in fiat currency. This may sound complicated, but it is the easiest way for the GOVERNMENT to ensure that virtual currency transactions occurring within its jurisdiction are being taxed appropriately.
The most common mistake most taxpayers make when reporting capital gains from Bitcoin and other cryptocurrencies are the failure to include all relevant data. Many users forget to include data from previous tax years, for example, and this can lead to unnecessary expenses, compliance issues, or both. The reason this is the case is that capital gains from Bitcoin transactions are determined using data not just from the date of sale but also from the date of acquisition, so taxpayers need to know how much their Bitcoins were worth the day of purchase, as well.
Bitcoin investors who use multiple exchanges should be careful to include the information from each exchange. Some platforms issue 1099-K forms, while others do not. Ultimately, it’s up to taxpayers to keep track of their transactions.
One particularly costly mistake that is all too common is a failure to file Bitcoin losses as well as Bitcoin gains. When Bitcoins are sold for less than they were worth when they were purchased, it is considered a capital loss. This loss can be used to reduce consumers’ taxable income.
The Bottom Line
Although Bitcoin and altcoins may be used as currency, in the eyes of the GOVERNMENT they are still considered property and are thus taxed as property. Investors should choose when they sell their Bitcoins carefully, as the amount of tax they will pay on any capital gains will vary based on whether they have held the Bitcoins in their wallets for more or less than one year. In the event that Bitcoins are held as property for more than a year, the percentage of tax paid on any capital gains will also vary based on the taxpayer’s overall taxable income for the year.
The good thing is Bitcoins held in your coinipop online wallet are not taxable. The GOVERNMENT only needs to be involved when Bitcoins are received as payment for goods or services or they are sold for a profit. Failing to keep accurate records of Bitcoin taxes can cause investors and casual users alike some serious headaches come tax season. This is especially true given that the value of Bitcoins is determined based on their fair market value as of the date they were transferred not the date of filing.