Bitcoin and Taxes: What Do You Pay When You Gain?
As soon as there was real money to be made in the cryptocurrency market, people started to get confused. It’s profit, but how does it fit into my taxes? Do I owe the government anything from my Bitcoin payday? The answer is a resounding yes. You might find yourself in legal trouble if you forgot to report cryptocurrency earnings.
The IRS and Bitcoin
The IRS has become aware of the cryptocurrency market since the Bitcoin boom. Cryptocurrency is hard to classify. It isn’t reported as a traditional investment profit, because it isn’t a traditional investment. Instead, it’s reported purely as income or money made. If you made more than what you spent, the IRS sees it as a gain. They’re expecting you to report that gain and pay the appropriate percentage based on your tax bracket. If you gained a lot, your tax bracket might change based on cryptocurrency profits alone.
Taxes for Selling or Using Cryptocurrency
Directly buying or selling cryptocurrency is treated as regular income as far as the IRS is concerned. Things get a little trickier when you’ve actually spent the cryptocurrency. Since companies and the general public are warmer to accepting certain types of cryptocurrency as payment, cryptocurrency is being used as real money. Therefore, it has a monetary value in these circumstances.
If you traded cryptocurrency for something expensive, like a new car, the IRS views the cryptocurrency like money. Rather than paying taxes on the cryptocurrency you traded, you’re on the hook for the capital gains tax. Capital gains covers how much value the cryptocurrency gained from the time you bought it until the time you used it. It can be as much as 20% in taxes.
Taxes for Investing and Holding On to Cryptocurrency
If you bought cryptocurrency and didn’t do anything with it, you don’t have to pay taxes. As it currently sits, it’s an object that you own. You haven’t profited from it or used it for anything, and you don’t have to pay taxes unless you do. If you’re a patient investor who hasn’t moved yet, you’re in the clear.
