Bitcoin is listed on many crypto exchange sites and has been paired with a wide variety of leading world currencies, with two of them being the US dollar and the euro. With its escalating significance, the US Treasury would eventually acknowledge Bitcoin by announcing that bitcoin-related transactions and investments are not illegal.
In the beginning, the appeal of Bitcoin was mostly credited to the fact that it was unregulated and is useful for evading tax obligations. Its universality and virtual structure also make the cryptocurrency difficult to keep track of in transactions conducted between different countries. Moreover, government authorities would come to realize that Bitcoin enticed black marketers who could conduct illicit deals.
As one might expect, Bitcoin was unable to avoid the tax authorities for much longer.
Bitcoin and Taxation
The IRS states that virtual currency does not, in any jurisdiction, have status as legal tender. It is often referred to as being “convertible” virtual currency, assuming it has a corresponding value in real currency. Alternatively, if it ever acts as a substitute for real currency. It is possible to exchange it for another currency, whether it be real or virtual, and trade it digitally.
Furthermore, the IRS indicates that the treatment of Bitcoin suggests that it is property and is thus subject to general tax principles. Investors need to include in their gross income the fair market value of the currency in US dollars. That is to say, if these investors are paid in bitcoins. Transactions that utilize virtual currency need to be reported in US dollars.
It is important to note that bitcoins‘ fair market value is typically established by putting them through a US dollar conversion at the exchange rate that is in place when they are received.
Due to bitcoins being viewed and treated as assets, using bitcoins for simple transactions like purchasing groceries will incur a capital gains tax. Whether it is long-term or short-term will depend on how long the investor holds the bitcoins. Regarding Bitcoins, there are various transactions that will ultimately result in taxes. Below are said transactions:
- Selling bitcoins that were personally mined to a third party
- Selling bitcoins that were purchased from someone else to a third party
- Using bitcoins that someone may have mined in order to buy goods or services
- Using bitcoins that were bought from someone to purchase goods or services
How It Is Taxed and Useful Tools
Bitcoin, along with other crypto assets, is said to have the best possible tax treatment for long-term investors. The IRS‘ official guidance on crypto taxation states that crypto is taxed as “property,“ which means that the way it is taxed is similar to a stock. When an investor purchases bitcoin and holds it for over a year, then they can pay long-term capital gains when they sell.
In the case of federal taxes, this means that investors pay a 15% tax on any gains unless they happen to generate a large profit (more than $479,000 for married couples or $425,800 for individuals). In this situation, they pay 20%. Evidently, this is a favorable comparison to a majority of other alternative investments.
