Introduced by someone named Satoshi Nakamoto in 2009, Bitcoin is a financial instrument that exhibits the properties of money and a digital asset. Although the cryptocurrency market entered a bearish trend in 2022 amid negative political and economic developments around the world, digital assets continue to take the world by storm. Many people – including both large investors and ordinary enthusiasts – see the falling price of Bitcoin and other major cryptos as an opportunity to buy assets that are likely to grow in value over the long term.
Besides, being highly volatile in its nature, crypto presents a lot of opportunities for speculative traders who like to go short. Whether you want to buy some tokens to store your wealth or to trade for profit, you need to know how buy Bitcoin with card is taxed. We are here to answer the question is Bitcoin taxable, as well as to explain possible levy cases and when you need to file a tax return and pay taxes to avoid possible penalties.
Features of Bitcoin Taxation
Cryptocurrencies such as Bitcoin and Ethereum are still something new and unexplored for many people. Unlike traditional assets such as stocks, securities, precious metals, or fossil fuels, they are not represented in the physical world in any way, and therefore provide a somewhat different experience, especially for those deciding to invest in them for the first time. Once you buy some tokens, you will not be able to touch or even see them, unlike fiat money or gold bullion. Moreover, operating in a decentralized ledger (blockchain) where there is no central authority, they offer anonymous peer-to-peer transactions. Given all of the above, you may be wondering: is Bitcoin taxable?
The truth is that the tax authorities of most developed countries consider Bitcoin to be a convertible virtual currency. This means that they recognize the real value of Bitcoin, Ethereum, and other virtual assets and that they can be exchanged for national currency units, which is what is known as fiat money. From all of that, it follows that you have to pay a toll on the profits you make from cryptocurrency transactions. However, not every crypto transaction is a levy case. If you already have some virtual coins in your crypto wallet or you are about to invest in crypto to profit from it, you need to find out which transactions are tax cases. So, here are some takeaways regarding the obligation of crypto profits:
- If you have a few tokens and decide to sell them for a profit, this is treated as a capital gain transaction similar to selling a stock that has appreciated in value relative to its purchase price.
- If you want to use Bitcoin or another crypto to pay for goods and services, this too can be a levy case if the value of the tokens has increased. That is, in this case, you are using assets that have increased in value, i.e., there has been an increase in your capital.
- Businesses that use crypto wallets to accept payments for goods and services are required to report this on their tax returns, as the tokens received are income.
- If you receive virtual coins for working as a mining node, this is also a levy case as you increase your capital by an amount equal to the product of the number of coins and their value in fiat money at the time you receive the remuneration from the crypto network.
Notably, the mere possession of digital assets is not a levy case. However, the tax authorities of some countries treat crypto as property for tax purposes. This means that you need to pay taxes on Bitcoin if you use tokens for trading or simply sell them. You also have to pay tax on business income if you accept crypto payments. Every time you use virtual assets to make a profit, you are obligated.
Important Things to Know About Bitcoin Taxation
As the trend now is for tax authorities to step up enforcement action against those who own crypto, you must ensure that you act strictly within the law. There is a high probability for crypto enthusiasts and investors to become subject to audits and compliance checks, even though Bitcoin provides for anonymity of transactions. Moreover, the vast majority of crypto platforms are centralized, meaning they require some personal data from their users. There are many precedents when authorities have asked owners of centralized crypto exchanges to disclose the personal data of some users for audit purposes. So, below we will look at a few key things that anyone who decided to try their hand at digital assets should be aware of.
You May Be Contacted to Find Out Whether You’ve Ever Used Crypto
Taxpayers who receive tax returns in 2022 will probably have noticed a new item asking whether you have used digital assets such as buy Bitcoin with credit card. It is not hard to guess that your fate depends on the honesty of your answer. However, you will also find a footnote explicitly stating that you do not need to answer yes to the above question if you received tokens in exchange for fiat money. This means that not every crypto transaction is considered a levy case.
Not Having a Form 1099 Does Not Mean You Are Exempt from Paying Taxes
If you have worked with more traditional assets, you are probably used to your brokerage platform providing a 1099 form showing the income you have earned. However, this practice is not yet universally used by crypto platforms. Moreover, many exchanges are still not reporting fully to the authorities. However, as of January 1, 2023, many things will change as a consequence of a law passed in November 2021. This law requires crypto exchanges and brokerage platforms dealing with tokens to provide detailed reporting on Form 1099. The law has caused much debate and controversy, and lawmakers are working to improve it. However, as a crypto investor, trader, or miner, you are obligated to pay crypto taxes even if the 1099 form has not been provided.
Crypto Trading Increases Your Capital
Let’s say you buy securities and then sell them at a profit later on. The authorities treat such trades involving crypto as a way of building up capital. This means that you will pay short-term capital gains levy on assets held for less than a year. If you trade long-term and hold tokens for more than a year, you will have to pay a long-term capital gains levy under the current law. The tax authorities also take into account the fact that your trading activity may be loss-making. Enter the sum of your losses on your tax return and if it exceeds $3,000, you will not have to pay capital gains tax.
Simple Use of Bitcoin Is Not Always a Tax Case
By buying a few tokens with the intention of just holding them, you are not likely to create a tax liability for yourself. However, if you use crypto, there are some potential risks. For example, a levy case can arise when you exchange digital assets for fiat money and when you use virtual coins to pay for the value of goods or services.
The tax liability will arise if the value of what you receive in exchange for the tokens is higher than the value of the tokens. Keep in mind that there is no levy on crypto transactions. However, there is a capital gains tax that you must pay. So, let’s say you bought 1 BTC a month ago at a price of $20,000 and paid with crypto for a service at a time when the Bitcoin price was $21,000. The difference between the purchase price and the price of the token at the time of use corresponds to a capital gain, and that means you should be prepared for the bill.
Crypto Gift Tax
Like some physical assets, crypto can be the object of a gift. For example, you received some tokens as a gift from a loved one or acquaintance. In 2022, a gift of $16,000 or more is subject to the gift levy. Notably, it is the giver of the crypto who is liable to pay the tax, not the recipient. However, there are several ways to avoid paying gift tax – check them out below:
- If you are a married couple, you can give gifts of up to $32,000 a year divided equally between you and your spouse.
- Charitable donations and gifts for medical or educational purposes are not subject to taxation.
- The gift tax only applies when you exceed the lifetime gift limit of about $12 million for a single taxpayer and just over $23 million for a married couple.
To avoid paying levies on the gift of crypto or to reduce the tax burden, discuss this with your financial adviser. Keep in mind that if you have received some tokens by inheritance, this property may also be subject to inheritance tax as the tax authorities treat Bitcoin and other virtual coins as typical capital assets.
Taxes for Crypto Miners
As a reminder, cryptocurrencies circulate in a decentralized network where there is no central authority for control and monitoring. However, there are nodes that specialize in verifying and validating transactions. Called miners, they perform complex computer calculations to ensure the security of all transactions. As a result of the verification, a new block of transactions is created and the mining node receives some tokens as a reward for the work done.
According to law, your income is the value of what you produce. That is, when you are mining, you are earning income and must pay levies accordingly. However, as mining is a resource-intensive process that involves some costs, you should report all costs on your tax returns.
Exchange of Crypto for Another
When you exchange Bitcoin for example for Ethereum, you are actually using the tokens as money to buy digital assets and this is a tax case. Report any gains or losses resulting from exchanging one virtual coin for another to avoid negative consequences. To make your life easier, use crypto exchanges and brokerage platforms that offer automated reporting tools for such exchange transactions.
Interest in digital assets has increased significantly in recent times. Despite the emerging negative trends in both the global economy and the cryptocurrency space, tokens are still in high demand. Proven to survive major disruptions – contrary to the claims of some negative pundits – cryptocurrencies have shown that they are not just another bloated economic bubble.
Tokens can be used like regular money to buy goods and services. In addition, many people invest in them as in ordinary stocks. And that’s why many governments in developed countries look at tokens as a property that can cause obligation cases. So, here are a few key takeaways from the above:
- Transactions to buy, sell or exchange can result in both capital gains and losses and this is a chargeable event.
- Any transactions in virtual coins which generate income for you are treated by the authorities in the same way as transactions in traditional assets.
- You must report your gains or losses from crypto transactions by completing the relevant forms.
- You need to keep a record of all transactions noting the real value of the highly volatile asset as its price can change dramatically.
It is interesting to know that Coinbase was forced to disclose the details of a huge number of its users as a result of a 2016 lawsuit. This means that if you avoid paying tolls, you run the risk of one day being exposed and suffering serious losses due to a breach of applicable law.
As a crypto investor, trader, or just enthusiast who has purchased a few digital coins, you need to be somewhat more organized throughout the year. That is, you should note data such as the value of the crypto at the time of purchase as well as its price at the time of operations on it to know how much your capital has grown. You can do all the work manually, but it’s much better to choose a crypto platform with tools to track and organize your crypto transaction data. And if you’re not sure if all the numbers you get are correct, it’s better to get help from a qualified accountant.
1. How are cryptocurrencies treated by tax authorities?
In developed countries such as the US, Australia, Japan and the EU, cryptocurrency is generally treated as a capital asset that can be subject to the obligation in certain cases. This means that if you work with crypto, you need to report it on your tax returns.
2. Do I have to report any crypto transactions?
Not every crypto transaction is tax-deductible. However, if you have transactions that result in capital gains, you must report this on your tax return and pay the appropriate amount of levy.
3. Who are crypto miners?
They are special nodes in a cryptocurrency network that are responsible for checking the records (transactions) placed in each new block. The lack of a central regulator is a major feature of the network in which cryptos circulate. Unlike traditional banking systems where there is a central supervisor and intermediaries, decentralized finance relies on mining mechanisms to secure transactions and issue tokens (blockchains based on the PoW consensus mechanism).
4. Why should miners pay taxes?
Since a successful miner’s work results in a certain number of digital assets generated by the network as remuneration, the miner makes a profit that increases his/her capital. Therefore, the miner must pay a levy on the profits generated.
5. Do I have to pay taxes on my Bitcoin holdings?
According to the ‘how are Bitcoin gains taxed’ rules, you only have to pay taxes when you make a profit. That is, if you sell it, exchange it for other tokens or exchange it for fiat money to make a profit, you must pay a levy.
6. Do you pay capital gains on Bitcoin and how much tax do you have to pay?
You do not pay tax on Bitcoin only if you are just storing tokens. Various transactions, such as sales, exchanges, etc., are subject to tax. The amount of tax you have to pay depends on several things, including trading volumes, your levy bracket and the amount of your income.