Is Bitcoin Taxable? Understanding How Bitcoin Transactions are Tracked and Taxed

Tommy Wyher  |

Platforms like Crypto Calculator US could help tax authorities determine the real-time value of bitcoins during the transaction to establish the applicable tax.

Bitcoin is a virtual currency that is based on a cryptographic encryption framework which facilitates secure transactions and storage. Unlike the traditional flat money, bitcoin is not produced by the central bank, nor is it banked by any. Instead, bitcoins are generated by a process called mining whereby high-powered computers, usually on a distributed network, employ an open source arithmetical formula to produce bitcoins.

Generating a single bitcoin uses up powerful hardware resources and may take hours or even days to mine the cryptocurrency successfully. However, for those that don’t have the resources to mine bitcoins, you can buy them by paying cash, through online cash transfers like PayPal or even pay using a credit card. Bitcoins are used like traditional currencies to purchase goods and services both online and in brick and mortar stores.

Recognized World Currency

Bitcoin is now an internationally accepted form of currency alongside US dollar and Euro among other leading world currencies. Bitcoins are currently listed on exchanges in the United States and continue to be adopted by countries all over the world. The breakthrough came when US Federal Reserve acknowledged the growing significance of Bitcoin, and this sends a strong message to world economies that bitcoin-related transactions and savings are legal.

Initially, traders and investors were partly attracted to bitcoins because it was unregulated and therefore, they could use it in transactions and smartly avoid paying taxes.

The virtual nature of bitcoins and its universality makes it harder to keep track of purchases. But, since government authorities realized that bitcoin transactions attracted black market deals, the tax authorities have put stringent measures to ensure bitcoin owners pay their tax obligations. Overdraft Apps suggests putting away a little extra money if Bitcoin is sold to make a large profit in order to pay for taxes at the close of the tax year.

How Bitcoin Transactions Are taxed

Tax authorities all over the world have tried implementing regulations on bitcoins. The Internal Revenue Service (IRS) in the US and their counterparts from other nations mostly share the same policies regarding bitcoin transactions. The IRS declared that bitcoin would be treated as an asset or a virtual property rather than a currency since a central bank of any country does not issue it. The fact that bitcoins are treated as assets, their tax implications become clear.

The IRS has compelled all bitcoin owners to report all transactions facilitated by the cryptocurrency, regardless of how small in value. This means, therefore, every US taxpayer is obligated to keep a record of all selling of, buying off, investing in, or making bitcoin payments for goods and services. Since bitcoins are treated as property, if you make a simple bitcoin transaction like buying groceries at a store, you will incur a capital gains tax which is calculated according to how long the owner has been holding the bitcoins.

Bitcoin transactions that are taxable include:

- Selling bitcoins, which you’ve mined personally, to a third party.

- Selling bitcoins, bought bitcoins, to a third party.

- Using bitcoins, which you’ve mined, to purchase goods or services.

- Using bought bitcoins to buy products or services.

The first and third scenarios include mining bitcoins using personal resources and selling them to someone else either for cash or equivalent value in goods or services. The worth gotten from transacting the bitcoins is either taxed as a personal or business income after deducting all expenses incurred from the initial mining process. Such fees may include, computer hardware used in mining and the cost of electricity. This means that, if you mined ten bitcoins and disposed of them for $300 each, then you have to report the $3000 as taxable income before any expenses are deducted.

The second and fourth scenarios are treated as investment in an asset. If, for example, you bought each bitcoin for $250, and sold one bitcoin for $450 or an equivalent value in goods – you’ve gained $200 of the bitcoin over the holding period, and therefore the profit (i.e. $200) earned will be subject to a capital gains tax.

Short-term capital gains tax applies to bitcoins held for less than a year before a transaction. Such a scenario is treated as an ordinary income tax rate. However, if the bitcoins are held for more than a year, they are subject to long-term capital gains.

Nonetheless, taxation on bitcoins and its tracking is still a challenge to most governments. To begin with, bitcoins are very volatile, and they rapidly chance in prices in a single trading day. Therefore it is difficult to determine the fair value of the coins on sale and purchase transactions. Fortunately, you can use bitcoin calculators to determine the real-time value of the bitcoin during transactions. The amount recorded is tax applicable.

DISCLOSURE: Author has no financial interest in investing in any of the mentioned investments.


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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