Is Your Bitcoin Profit Taxed?

March 11th, 2018

Bitcoin is a popular digital currency that uses a cryptographic encryption system that facilitates secure storage and digital transfers. Over time, Bitcoin has gained attention across the globe and is believed to have all the benefits of an alternative currency. Unlike traditional currencies used today, Bitcoin is not beholden to any central bank, government, or financial authority. Meaning that this currency is completely decentralized. A process referred to as mining generates Bitcoin. Mining uses high powered and sophisticated computers on a distributed network, using an open sourced mathematical formula to generate Bitcoins. For mining purposes, Bitcoin users need to use specialized tools and devices.

Now that Bitcoin has been out on the market more, mining is quickly becoming a tiring and time consuming process that involves expensive, high tech hardware to mine Bitcoins. Even after all the fancy gadgets have been bought for mining, it still takes the miners days to mine Bitcoins. Digital currency users can mine or just buy Bitcoins from reliable sources with their credit or debit cards. More and more businesses are accepting Bitcoin as payment for goods and services.

The Popularity Of Bitcoins

With the growing popularity of Bitcoin, more and more people around the world are beginning to understand the benefits of this digital currency. Bitcoins are now listed as currency in many places, right along with leading national currencies like the Euro or US dollar. The United States Federal Reserve has acknowledged the growing popularity and the importance of digital currencies, when they announced that Bitcoin and Bitcoin-related transactions aren’t illegal. One of the selling points of Bitcoin was the fact that it wasn’t regulated by the government and could be used to avoid tax obligations. However, new rules and regulations are coming to light that may require Bitcoin users to pay taxes on their Bitcoin gains.

The virtual nature of Bitcoin has made it harder to keep track of in cross country transactions. Government authorities from around the world have started to realized that Bitcoin is attracting black marketers for all types of illegal activity. Obviously, it was impossible that Bitcoin was going to evade tax laws forever. Tax authorities from different countries have started to regulate digital transactions. The United States Internal Revenue Service (IRS) are treating Bitcoin as an intangible property, not a mere currency as it is not regulated by a central bank.

Bitcoin Tax Rules

The IRS has recently made it mandatory to report all digital currency transactions, for any amount. This means that all US taxpayers need to keep a record of all of their Bitcoin transactions. No matter if they are buying, selling, or investing in Bitcoin. Bitcoins are now treated as assets and as such if you use bitcoins for any transactions (like buying goods or services), you will incur tax.

If Bitcoins are stored for a period of less than one calendar year before they are sold or exchanged, a short term tax will be applied. This tax is equal to ordinary income tax rate for the individual. However, if Bitcoins are stored for longer than one year, long term tax rates will be applied.

The taxation on Bitcoins and other digital currencies  is not as simple as it may seem. It can be difficult to determine the value of Bitcoin for sale and purchasing transactions. The price of Bitcoin is highly volatile and at time there are huge price swing in a single trading day. The IRS has now made it mandatory for traders to report on their Bitcoins consistently. For example, if they are using the day’s high rate for a purchase, the same prices should be used for sales too.

 

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