Bitcoin and other virtual currencies have attracted the public eye recently due to their high prices. The number of retailers accepting Bitcoin payments has increased significantly. Also, some employers are considering paying employees with this digital currency. Apart from serving as a digital currency, Bitcoin is also an asset for some people. Thus, some investors purchase and hold onto their tokens for months or years, waiting for their value to increase. But what are the tax implications of this digital currency?
Bitcoin is receiving wider acceptance and usage across the world. As of 2021, Bitcoin was the most circulated and valuable digital currency, selling at more than $65,000. Some people call Bitcoin a convertible digital currency because they can trade it on platforms like the Bitcoin Prime Software to receive fiat money. Perhaps, you can go to this platform BitcoinBuyer to register and sell your Bitcoins if interested.
However, trading or investing in Bitcoin comes with tax implications. And every crypto investor or trader should understand these implications before starting. If planning to trade or invest in Bitcoin, these tips can set you up for success.
Bitcoin Payments Attract the Same Tax with Income
Any employer that pays employees with Bitcoin must report their earnings to the IRs using W-2 forms. Also, they should convert Bitcoin value to the U.S dollar when making the payment and maintain complete records. Paying wages in this virtual currency attracts withholding equal to dollar wages.
IRS requires employees to report total W-2 wages in U.S dollars even when employers pay in Bitcoin. Also, self-employed people who receive income in Bitcoin should convert it to U.S dollars when they receive it and include it on tax returns.
IRS Tax Bitcoin as a Property
Currently, the IRS treats Bitcoin as a property rather than security. Consequently, the IRS taxes Bitcoin as a property, meaning you must file long-term or short-term capital gains depending on the duration you hold this asset.
For instance, a short-term tax rate applies depending on the filing status and income if you hold this cryptocurrency for less than a year. A long-term tax rate will apply if you keep your cryptocurrency longer than this.
Know When IRS Taxes You
Many Bitcoin traders and investors don’t know this, but cryptocurrency taxation can occur even when not converting it into fiat money like Euros and dollars. Taxable events happen even when swapping Bitcoin for another cryptocurrency, including stable coins.
The initial cost basis determines the taxable amount for every transaction. And this is the amount you initially pay for your respective tokens against their disposition price when converting it into something else or selling it.
Using Crypto Exchanges Doesn’t Attract a Tax
Like with conventional assets, buying digital tokens is not a taxable event. Moving Bitcoins from one crypto exchange to another is not a taxable event. However, token disposition at a profit or loss is primarily taxable.
If you receive Bitcoins from another person in a crypto exchange as payment for a service or product or acquire an interest in Bitcoin, you might pay a tax. That’s because the event compares to the profit you receive from traditional securities.
Use Crypto-Based Tax Tracking Software
Tracking Bitcoin trades’ tax impact will be safer and easier if you use a crypto-focused tax tracking tool. If you link a crypto exchange with this software, you can automate the process of filing taxes when transacting with Bitcoin. That way, you can avoid penalties for evading tax when using Bitcoin.
Follow these tips to avoid trouble with the taxman when using Bitcoin. If necessary, talk to a professional specializing in cryptocurrency taxation for assistance.
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