Popular Science | What you need to know about Bitcoin and taxes

Original article: https://bitcoinmagazine.com/culture/need-to-know-bitcoin-and-taxes

Compiled by: Bibab

summary:

• Do I have to pay taxes when buying Bitcoin?

• Do I have to pay taxes when selling Bitcoin?

• Which transactions require me to report my Bitcoins?

These are questions that almost every Bitcoin holder has asked themselves at some point in their Bitcoin journey. The topic of taxes and Bitcoin can be daunting at first, but once you have a solid understanding of the possible tax implications of your Bitcoin, you can make better decisions to reduce the burden on the government. Over the past year, I have been working under one of the top Bitcoin tax experts in the United States and have learned everything there is to know about Bitcoin and taxes. I can attest that understanding the regulations and laws regarding Bitcoin taxes can make a big difference in helping you leverage Bitcoin.

Are there any Bitcoin taxes?

There is actually nothing called "Bitcoin taxes." When people refer to taxes and Bitcoin, they are referring to the capital gains tax that a person must pay when selling or trading Bitcoin. This is because Bitcoin is considered property under the IRS's current view (see IRS Notice 2014-21). According to Notice 2014-21, the IRS states that "Virtual currency is treated as property for federal tax purposes. The general tax principles that apply to property transactions apply to transactions using virtual currency." This effectively means that capital gains taxes on Bitcoin are no different than capital gains taxes mentioned for profits from stocks.

Capital gains are taxed at different rates depending on your income level and how long you hold your Bitcoin.

Capital Gains Tax: Short-Term vs. Long-Term

Capital gains taxes are divided into two categories, short-term and long-term, depending on how long you hold the asset.

Short-term capital gains taxes apply to profits from the sale of assets you held for less than a year. Short-term capital gains taxes are tied to where your income falls in the federal tax bracket, so you will pay the same tax rate you pay for ordinary income taxes.

Long-term capital gains taxes apply to assets held for more than one year. Long-term capital gains tax rates are 0%, 15%, and 20%, depending on your income. These rates are generally much lower than ordinary income tax rates, which is why HODLing is always the most tax-efficient strategy.

The graphic below represents the current long-term and short-term capital gains tax rates in the United States.

Note that there are also different state tax rates that are applied to capital gains. These rates range from 3%-10%.

Capital Loss

If you sell your Bitcoin at a loss, that is, if you sell it for less than you bought it for, you are entitled to a tax loss deduction, lowering your overall tax bill. You can deduct up to $3,000 per year from capital losses, or use it to offset some of your capital gains. Any capital losses over $3,000 will be rolled over to later years and can help offset future gains.

For example, if you had a loss of $6,000 in 2020, you would deduct $3,000 from your 2020 income, reducing your tax bill, and be able to deduct another $3,000 in 2021, or if you had a gain in 2021, you could use that $3,000 to reduce your gain.

Which transactions are taxable?

Understanding which transactions are taxable is important for planning ahead and making informed decisions about how to best use your Bitcoin. Let’s break down what is and is not a taxable event.

• Taxes: Any time you trade, spend, or sell your Bitcoin, you will need to pay taxes and must report it to the IRS. You will also need to report any income from Bitcoin mining for tax purposes.

• No taxes: HODLing, buying Bitcoin with fiat currency, sending Bitcoin from one wallet or exchange to another, and using Bitcoin as collateral are all tax-free.

What is the best way to pay taxes?

I recommend FIFO (First In, First Out) to most, if not all, of the clients I work with. This means that the first coins you buy will be the ones you decide to sell, spend, or trade, at a cost and for how long you hold them. FIFO is always good for Bitcoin holders because it makes it easier for you to earn long-term capital gains.

How to track capital gains in Bitcoin?

Tracking capital gains and losses can be quite difficult, depending on how much movement you have with your Bitcoin. Moving and storing Bitcoin in different wallets and exchanges can lead to quite a headache when trying to figure out the costs and holding periods of the Bitcoins you traded, spent, or sold. Luckily, there is software out there, like Cointracking.info (my personal favorite), that allows you to easily import your data and do the calculations for you. Once you have calculated your gains/losses, either through the software or on your own, you can report those numbers on Form 8949. These numbers flow to Schedule D on Form 1040.

My suggestions:

My biggest advice to any client is to keep a notebook of everything and try to only use some fiat currency and some secure hardware or polynomial wallet. This will make the whole process of calculating your gains/losses much easier. I also recommend not selling your Bitcoin until it is a unit of account, I understand everyone has reasons for wanting to sell along the way. A good way to get around this is to put your Bitcoin as collateral with a company like Unchained Capital. As long as you are not selling your Bitcoin to buy an Aston Martin.

Hopefully this post will give you a better understanding of how taxes affect you so you can make better decisions and minimize your payments to the greedy U.S. government.