With the increasing popularity of Bitcoin, more and more people are joining the crypto community. People are not just investing, but are also getting involved in trading, exchanging, and mining, and many employers are even paying their employees in cryptocurrency.
However, not many people are aware of the relationship between Bitcoin and taxes. This article puts together the most common crypto activities, how they are taxed, and some ways in which you can minimize your taxes.
Is Bitcoin Taxable?
As of 2021, Bitcoin is one of the most frequently used cryptocurrencies or virtual currencies in the world. Due to the fact that it has a real-world equivalent, it is often termed a convertible virtual currency. But does this virtual convertible currency have any tax obligations?
Various transactions and events related to cryptocurrency — like exchanging, trading, swapping, gifting, mining, and the like — have tax consequences. This rule was stated by the Internal Revenue Service in the Notice 2014-21, which also answers a lot of questions about the taxability of Bitcoin and a number of taxable scenarios.
Tax Tips For Smart Tax Planning
As mentioned above, the IRS considers cryptocurrencies as property and taxes them accordingly. But do all crypto activities trigger tax consequences? How does one know which tax to pay and how to plan for the tax season? Here we have put together the most common crypto transactions, that’ll help us understand how these events are taxed.
Bitcoin And Taxes: Receive Payments In Crypto
You must report to the IRS in case your employer pays you with Bitcoin. You must do so by filing the W-2 forms.
- Record the date of payment and the corresponding U.S. dollar value of the Bitcoin you receive.
- The taxes, when you receive payment in crypto, is almost similar to the tax you pay on receiving fiat currency payment.
Self-employed people who have Bitcoin gains or losses from sales transactions must also exchange the virtual currency for dollars on the day it is received and record the figures on their tax returns.
Bitcoin And Taxes: Capital Assets
The IRS considers cryptocurrency as property when it comes to taxes. If you’ve bought cryptocurrency and sold them for a profit or loss after holding them for a period of time, you’ll have to pay capital gains or capital loss taxes on the profit. Your tax will depend on the holding period of the assets as well as the income slab you come under.
- Your assets will be subjected to short-term capital gains if you’ve held them for less than a year. As of 2021, the tax rates for short-term capital gains range from 10% to 37%, depending on your income.
- On the other hand, your assets will qualify for long-term capital gains tax if you’ve sold them one year after you’ve acquired them. The tax rate for long-term capital gains ranges from 0% to 20% in 2021, depending on the income tax slab.
Bitcoin And Taxes: Bitcoin Mining Rewards
Some people “mine” Bitcoin by validating Bitcoin transactions and maintaining the public Bitcoin transaction ledger by solving complex mathematical problems.
- After you’ve successfully mined crypto, you will be rewarded with some crypto as an income. You must calculate the fair market value of the respective digital currency on the day you receive it and include it in the gross income.
- If you are a self-employed miner, you’ll have to file for self-employment taxes on your earnings, minus the applicable tax deductions.
Bitcoin And Taxes: Donating And Gifting
Not coming to one such crypto activity that isn’t really taxable but rather helps you minimize your taxes. You can do this by donating and gifting your crypto assets.
If you donate cryptocurrency to a registered tax-exemption charity, you can save yourself from paying hefty taxes.
- If you’ve owned the assets for more than a year, you can deduct 30% of your annual gross income.
- If you’ve held the assets for less than a year, you can deduct 50% of your AGI and lower the cost-basis or FMV of the assets you’ve contributed.
The IRS in the United States permits you to give crypto worth up to $15,000 as a gift to friends and family members. But if the value of your gift exceeds $15,000, you must record it on Form 709 and file a gift tax return.
The Bottom Line
Filing and reporting taxes can be a tedious process. But using these smart tax tips you can file your tax returns without breaking a sweat.
FAQs
- Does Bitcoin have any tax obligations?
Various transactions and events related to cryptocurrency — like exchanging, trading, swapping, gifting, mining, and the like — have tax consequences. This rule was stated by the Internal Revenue Service in the Notice 2014-21, which also answers a lot of questions about the taxability of Bitcoin and a number of taxable scenarios.
- Do you pay taxes on Bitcoin mining?
Some people “mine” Bitcoin by validating Bitcoin transactions and maintaining the public Bitcoin transaction ledger by solving complex mathematical problems. After you’ve successfully mined crypto, you will be rewarded with some crypto as an income. You must calculate the fair market value of the respective digital currency on the day you receive it and include it in the gross income.
- Is gifting crypto taxable?
The IRS in the United States permits you to give crypto worth up to $15,000 as a gift to friends and family members. But if the value of your gift exceeds $15,000, you must record it on Form 709 and file a gift tax return.