Cryptocurrency activities are increasingly popular and profitable for investors. However, some countries still do not license the legality of cryptocurrency transactions. This raises the question: are there taxes on Bitcoin? Let’s find out with Coinminutes after reading the article below.
Are There Bitcoin Taxes?
Getting straight to the point, whether there a Bitcoin taxes or not depends on the policy of the country you are investing in, what type of bitcoin you are holding? How long did you hold it and what were the profits and losses? and many other factors.
Bitcoin taxes will take place in the country that considers Bitcoin as an asset, then clarifies and taxes it. IRS – The US Internal Revenue Service has forced tax-paying investors to report their transactions, from small to large. All are required to keep records of any Bitcoin-related transactions they have made. However, tax collection for Bitcoin investors still faces many shortcomings when the IRS cannot control all citizens who are making profits on Bitcoin. And of course, these reports cannot be completely accurate and authentic.
Bitcoin Taxes Basis
To calculate tax rates for Bitcoin, regulations will be based on the following factors:
- Investor’s income framework.
- Transactions are evaluated as losses or profits.
- Determine whether the loss/profit is short-term or long-term.
- Consider cryptocurrency/bitcoin mining as a profitable business or a hobby.
Although there are factors to rely on to calculate tax rates, most investors today buy cryptocurrencies and hold them in wallets. They will make a profit by holding for a long time and selling if the price is good.
Taxable Events in Bitcoin Transactions
Buying and selling Bitcoin
Buying and selling Bitcoin are events subject to Bitcoin price. It is included in taxes based on capital gains income.
In the United States, there are two main sources of income that are taxed: ordinary income and capital gains income. In this case, if you receive or give away Bitcoin as payment for goods or services or through an airdrop, then the amount you receive will be taxed as ordinary income.
If you intend to sell or liquidate your Bitcoin, this transaction will be counted towards capital gains and losses. You will be taxed as capital gains or losses depending on how much you won or lost from your trades. This tax is also calculated into 2 types based on short-term or long-term depending on the time you hold Bitcoin.
- If you are holding an amount of Bitcoin for less than 1 year, you make transactions that generate profits, it is called short-term capital gains. Short-term capital gains will be added to your income and taxed at ordinary income tax rates.
- If you hold a specific amount of Bitcoin for more than a year, you will have to pay taxes on long-term capital gains, however, there are tax incentives ranging from 0%, 15%, or 20% depending on your taxable income and filing status.
Mining and staking
According to the IRS, one of the types of transactions that must be taxed is the “Receipt of a new digital asset as a result of mining or staking activities”. This means that all data related to mining or staking must be carefully recorded, from the date the bitcoins were mined to the exact value of the mined bitcoins.
Bitcoin Taxes Liabilities and Penalties
Consequences of non-compliance
Tax evasion is when taxpayers intentionally do not pay taxes on any source of income. Whether it is Bitcoin or any other issue such as salary, stocks, real estate, or other investments. If the IRS discovers that you did not declare taxes or evade taxes, they will have a reason to check and punish you. In case you are discovered to have evaded taxes, the result will be a note on your federally managed personal history: “Ever tax evasion”. And, many years later, you still receive debt collection papers for tax evasion. Thus, your opportunity to enjoy social security benefits when unemployed or in difficult living situations will be greatly affected.
Even more seriously, tax evaders can be imprisoned for up to 5 years, and fined up to 100,000 USD for a year of tax evasion and exponentially if they evade taxes for many years.
IRS enforcement and tracking of cryptocurrency transactions
The IRS is responsible for managing and tracking transactions related to electronic assets, and they often require people to declare their income on tax returns.
They also regulate taxable gains or losses that may arise from electronic asset transactions including:
- Sell electronic assets for legal money
- Exchange a digital asset for real property, goods or services
- Exchange or trade one electronic asset for another
- Receive electronic assets as payment for goods or services
- Receive a new digital asset due to a hard fork
- Get a new crypto asset due to mining and investment activities
- Receive digital assets via airdrop
- Any other sale of a financial interest in electronic assets
Note: transfers of assets, including electronic assets, as bona fide gifts, require filing of Form 709, U.S. Gift Tax (and Generation-Skip Transfer) Return if fair market value is required. of the property, at the time of transfer, exceeds the donor’s annual gift exclusion amount at the time of transfer.
How Can I Avoid Paying Taxes on Bitcoin?
We strongly disagree with Bitcoin tax evasion, however, in some legitimate cases, you still have some ways to reduce tax or avoid it.
Selling Bitcoin at a loss
When the amount of Bitcoin tax is too large for you to pay, selling your Bitcoin at a loss can help offset the tax payable on profits from cryptocurrency withdrawals. When you sell your Bitcoin at a loss, you will only need to pay a much smaller tax than the original tax rate or even no tax at all. All net losses on Bitcoin trading can be carried forward to future tax years.
Cryptocurrency IRAs are personal retirement accounts that can help you maximize your income tax-free or tax-deferred. While most IRAs don’t allow you to invest directly in a Bitcoin IRA, you can still get around the rules by using other providers like iTrustCapital, Bitcoin IRA, or Coin IRA.
Take out a Bitcoin loan
One of the good ways you can reduce your Bitcoin taxes is instead of withdrawing your Bitcoin, consider using it to borrow.
According to the IRS, cryptocurrency loans are considered tax-free. If you need immediate Bitcoin liquidity, you can use your Bitcoin as collateral to borrow through a decentralized protocol.
Move to a place with low taxes
This is really the ultimate in your Bitcoin tax exemption tips. Currently, some cities with low taxes include Alaska, Nevada, Florida, South Dakota, Tennessee, Texas, New Hampshire, and Washington with no income tax.
You can even choose to move to countries where Bitcoin is not taxed to invest. At this time, Bitcoin is tax-free in some countries such as the United Arab Emirates, and Malta, …
So we have learned in detail about Bitcoin Taxes and clearly understood the ways to calculate Bitcoin taxes. Hopefully, the article that Coinminutes compiled will bring useful information to you.