Are Bitcoin Transactions Taxed?

March 13th, 2018

Unlike traditional currency, Bitcoin is not printed by a central bank, nor is this digital currency backed by a bank or government. Bitcoin uses a cryptographic encryption system to ensure secure storage and transfer from one account to another, usually referred to as a Blockchain. This digital currency is generated using a system called mining. Mining is basically the process of using high powered computers and systems over a distributed network to solve mathematical formulas resulting in bitcoins. As time has shown, many people are eager to get on board and start mining bitcoins. however, the process is much harder and expensive than it sounds. Mining is currently being carried out by high-tech hardware or devices by users for hours and sometimes even days.

How To Get Bitcoins

If you want to get your hands on some bitcoins, you have some options. You can either mine for this digital currency or you can simply trade cash or card for the digital currency. Bitcoin can be used like traditional currency to buy good and services both on and offline.

The End Of Decentralization

As popularity for Bitcoin has continued to rise, the US Federal Reserve and many other authorities have acknowledged the ever growing importance of this digital currency. Some have even gone to the extent to say that Bitcoin transactions cannot be deemed illegal. Initially, Bitcoin attracted customer because it wasn’t regulated by any government, therefore could be used to avoid tax obligations. However, with the increase of demand and need for regulation, this is changing.

Complicacy to track transactions

The virtual nature and universality, make Bitcoin almost impossible to keep track of-especially in international transactions. Many people have preferred using this currency as a way to evade tax. But government authorities from around the world soon realized that this digital currency attracted black marketers and could be used for illegal activity. Since this new development, it has become impossible for Bitcoin users to evade tax laws. The IRS and other authorities are all on the same page for how they want to treat Bitcoin taxes. These entities believe that Bitcoin should be treated as an intangible property or an asset, not as currency. This makes tax implications clear.

New Developments

The IRS has made it clear that all Bitcoin transactions, no matter the amount must be reported. This means that every US taxpayer needs to keep a record of Bitcoin transactions. Bitcoins are treated as assets, using Bitcoin for simple transactions like buying good or services will incur capital tax gains. Here are some different type of Bitcoin transactions that will lead to taxes:

  • Selling Bitcoins to a third party (mined personally)
  • Selling Bitcoins to a third party (bought from someone)
  • Using Bitcoins to buy goods or services ( mined personally)
  • Using Bitcoins to buy goods or services(bought from someone)

If Bitcoins are stored for less than one year before they are exchanged or sold, the tax that is applied is equal to an ordinary tax for an individual. If Bitcoins are kept for longer than one year, long-term capital gain tax rates will be applied. In the United States the long-term capital gain tax rates are categorized in a different bracket.Individuals need to pay tax at a lower than ordinary income tax rate if Bitcoin is held for over a year.

The reality of collecting tax from Bitcoin transactions is harder than it may seem. It may be difficult to determine the value of Bitcoin on purchase and sale transactions. Bitcoin is highly volatile and the value of Bitcoin can change daily. The IRS encourages consistency in reporting if the high price for purchases is used the same should be done for sales, too.

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