Bitcoin is a virtual currency that does not exist in any physical form, and its anonymous creator, Satoshi Nakamoto, introduced it in 2009.
People can use this virtual currency as a medium of exchange, a tool for investments, and a store of value.
Bitcoin is entirely decentralized, meaning it operates independently since financial institutions and governments cannot regulate how people spend Bitcoin.
Perhaps you can begin buying and selling Bitcoin by visiting Immediate Edge app.
In the US, the IRS treats Bitcoin like property for tax purposes. As a result, people incur capital gains or losses when selling, trading, or disposing of this digital asset.
Therefore, if this virtual currency appreciates or you sell/trade it for a profit, the government expects you to pay taxes on the gains.
The tax rate for his digital asset is determined by the number of capital gains or losses on this digital money, how long you have held the digital asset, and also your country’s specific regulations for imposing taxes.
So, if you use this digital currency to pay for goods and services, the IRS treats that as a barter transaction.
However, since each taxable event of this electronic asset may lead to capital gains, one must keep a record of the date, cost basis, sale value, and any other fees associated with each transaction.
- Here are some of the most accepted taxable events for this digital money:
- When you sell this digital asset for conventional currency
- When you sell Bitcoin for another virtual asset
- When you use this digital currency to pay for goods and services
- When you convert Bitcoin for another form of money
There are also events when the government can’t tax this electronic asset. These include:
- When you purchase this virtual asset
- If you gift your friends or family members this digital money
- When you donate this virtual money to a charity
- When you transfer this digital asset from one wallet address to another
Understanding how governments tax Bitcoin
When you purchase this digital currency from a reliable exchange, the tax man classifies it as being on hand. However, when you sell to someone else, they are considered on sale.
Therefore, you will be required to pay taxes on the transaction but not when this digital currency is just on your account.
What’s more, if you mine this electronic money, you are supposed to report your taxes whether you sell your Bitcoins or not.
So, you will incur capital gain taxes when you sell this virtual currency or use it to do something.
Can the IRS track your Bitcoin?
Some assume that since this virtual currency is relatively anonymous, evading taxes is possible.
However, the IRS will request a report from prominent crypto exchanges about their client’s information and a record of their Bitcoin income.
Bitcoin transactions are entirely anonymous, but the IRS will use the information it receives from exchange platforms such as the Bitcoin trading system to match the anonymous wallets to known individuals.
So, failure to report your Bitcoin gains or losses for taxing purposes is highly considered fraud.
Eventually, the IRS will enforce several penalties for tax fraud, including fines, interest, and even jail time.
How to reduce your Bitcoin taxes
Generally, you can reduce your Bitcoin taxes by being smart about which trades you make and when.
For example, you can decide to sell the digital asset you own at a loss in the fiscal year you are trying to reduce your taxes.
Eventually, your Bitcoin losses will help reduce your overall tax bill, decreasing your taxes.
Conclusion
Paying taxes on Bitcoin gains and losses is a requirement, especially in the U.S, Canada, and the UK.
So, one should report to the IRS their transactions to avoid specific penalties. Generally, the above article details everything on tax requirements.
Have any thoughts on this? Carry the discussion over to our Twitter or Facebook.
