Paying Taxes on Bitcoin Capital Gains

On: February 28, 2020

Whether you mine bitcoin for fun or profit, hold bitcoin as a long term investment, buy and sell bitcoin to day trade on its volatile price movements, or receive bitcoin as a gift, you are responsible for paying taxes on your bitcoin holdings if you reside in the US and are subject to the federal income tax. If you have sold bitcoin or used it to buy anything, you have incurred a tax burden on crypto capital gains that the IRS takes seriously. The consequences for evading taxes on bitcoin can be severe. The IRS is clamping down on bitcoin tax evasion and devoting a number of computational and personnel resources toward subjecting bitcoin users, miners, and investors to greater scrutiny. If the IRS finds you have not reported income from capital gains realized on bitcoin transactions, you will be subject to monthly penalties as a percentage of the unpaid tax obligation. Not only that, but the IRS will also expect you to pay interest on top of those penalties. So not paying taxes on bitcoin capital gains can be a costly mistake. While bitcoin is still an entirely new financial instrument / industry, regulators are now well aware of it and have offered some fairly simple guidelines on how to pay taxes on bitcoin capital gains. But if you or your business deal in a large number of bitcoins one way or another, it would be advisable to consult Leading Tax Group to ensure your capital gains filings are IRS compliant, and see about possible tax strategies to save you as much money as the tax code allows when you go to file. The IRS relies on taxpayers to forthrightly and accurately report their bitcoin capital gains, but subjects some taxpayers to audits to ensure they are meeting their obligation. The best practice when filing to pay taxes on bitcoin capital gains is to understand the tax code, and to file everything as if an IRS auditor were in the room with you and you had to explain every part of your filing to them and answer any questions they might have about your reasoning or requests for documentation to prove any claim you make in your filing and put it on solid ground. Buying bitcoin does not subject the purchaser to taxes, but selling bitcoin (for US dollars or any other cryptocurrency) creates a taxable event on the basis of capital gains or losses. That’s because bitcoin is viewed by the IRS as a security like stocks, bonds, or ETFs, and taxed as property. You calculate your capital gains or losses from a cost basis: the value of the bitcoin at the time you bought it, mined it, or received it as a gift or in payment for a good or service. The US dollar price of bitcoin at the time you sell it or use it to buy something, less the cost basis of the bitcoin is your capital gain or loss on the coin. If that figure is positive, it’s a gain. If it’s negative, it’s a loss. Short term capital gains are realized from selling bitcoin at a profit less than one year after acquiring it. These are taxed at your income tax rate. Long term capital gains realized after a year of holding bitcoin are currently taxed at a rate of 15% (or 20% if the profit is greater than $425,800).