Understanding the Relation between Cryptocurrency and Taxes

It’s been over a decade that bitcoin has made its debut but the confusion surrounding the taxes is still there. This cryptocurrency was considered as a mode of regular transaction but it still requires time to gain traction as a popular currency. But there’s no denying that bitcoin has become a revered choice amongst traders and speculators looking out for making quick money off its volatility. This brings us to the most important aspect of bitcoin, that’s cryptocurrency and taxes.

Is Bitcoins Free Of Taxes?

The Internal Revenue Service has already considered cryptocurrency transactions in their notice for the year 2014-2021. They have clearly stated that these alternative currencies will be treated the same way as it goes for assets like property.

They have also included a column on their Form 1040 in 2019 to assess whether an individual liable to pay tax has made any cryptocurrency transaction during the mentioned period. Based on the kind of transaction, assets can be classified under a myriad range of taxes. But the distinct traits and use cases for these alternative currencies imply that there are definitely some exceptions.

Is Tax Levied On Bitcoin Transactions?

In essence, the answer to this question is a ‘yes’. Since it’s classified as an asset, the tax implications are inevitable. Individuals are expected to report bitcoin transactions of every kind, regardless of the value. If you are a taxpayer hailing from the US, you will have to keep a detailed record of all the debit and credit along with investments associated with your bitcoin trading.

Back in 2019, the IRS has intimated with a warning letter to over 10,000 taxpayers on being suspected of failing to report incomes generating from virtual currency transactions. It was also mentioned that denial to report possible incomes can pave the way for interest, penalties, and in worst cases, criminal prosecution.

What Kinds Of Bitcoins Are Taxed?

To understand the connection between cryptocurrency and taxes, you need to comprehend the following types of transactions on cryptocurrency.

• Selling Bitcoins that are individually mined to any third party. In this case, you are liable to give a capital gains tax on the made transaction.
• When you are utilizing mined Bitcoins for buying any goods and services, then you must pay the applicable tax here. The amount is determined by the value of Bitcoins while selling and the value of the goods or services you have used it for.
• Selling of Bitcoin to a third party that you have bought from another person. When you are selling Bitcoins for more profit, then you are liable to pay taxes on your capital gains.
• When you are using Bitcoins that you have bought from someone for purchasing any goods or services, there again you will have to pay capital gains taxes.

In the first two scenarios, the tax levied is considered a personal or business income when the deduction of expenses is calculated during the mining process. On the other hand, in the case of the last two conditions, the tax is levied as investments from assets.