Whether you are new to crypto or are an advanced crypto trader, there’s one aspect of it that most people find confusing—crypto taxes! There might be times you find yourself looking for answers to questions like: is Bitcoin taxable, what crypto activities are taxed, what is capital gains tax, and so on. It is pretty normal to find yourself confused, we get it!
But the good thing is that this article will go over the basics of Bitcoin taxes and answer all your outstanding questions related to crypto taxes.
Is Bitcoin Taxable: IRS Regulations
The simple answer to the question is Bitcoin taxable, is YES! If you are a resident of the United States of America, there are certain provisions laid down by the Internal Revenue Service relating to the taxation of Bitcoin.
The Internal Revenue Service issued a Notice 2014-21 in the year 2021 that stated that the IRS considers cryptocurrency as property and that crypto does not have a legal tender in the US. In simpler terms, it means that cryptocurrency is taxed similar to stocks, bonds, and other assets.
Apart from the Notice 2014-21, the IRS has also released a detailed FAQ on their website that answers most questions related to Bitcoin taxes.
Is Bitcoin Taxable: Bitcoin Taxable Events
Now that we know about the taxability of Bitcoin, let’s jump into the main question of today’s article, is Bitcoin taxable? As discussed easier, the answer is yes! But to make the process easier for you, we’ve listed all the taxable crypto events for you.
1. Selling Bitcoin to a third party for cash
If you sell the Bitcoin that you mined or received from someone else, the profits incurred will be considered taxable as capital gains tax.
2. Buying goods and services using Bitcoin
If you buy goods and services using Bitcoin, your taxable amount will depend on the value of Bitcoin while you purchase and the price of the goods/services.
Let us understand these two scenarios with an example: Suppose you bought Bitcoin worth $800 and either sold them for $1,000 or bought goods worth the equivalent of $1,000. The $200 profit from the sale is subject to capital gains tax.
3. Buying one crypto with another crypto
If you buy Ethereum, for example, with Bitcoin, it is considered a disposition of Bitcoin.
4. Receive crypto as payment or by airdrop
In this case, the crypto is considered income and you’ll be taxed according to your income tax bracket.
Bitcoin Non-Taxable Events
The following crypto activities are not taxable:
- Donating Bitcoin to a non-profit or a charitable organization
- Purchase Bitcoin with cash and HODLing it
- Transferring Bitcoin between two crypto wallets
Tips For Bitcoin Taxes
To make sure you’re following the rules, here are a few tips that’ll help you file your Bitcoin taxes effectively.
- Keep a detailed record of all your crypto transactions, including the date of transaction, the fair market value when you mined or acquired it, as well as its fair market value when you used or sold it.
- The IRS considers three accounting methods, FIFO (first-in-first-out), LIFO (last-in-first-out), and HIFO (highest-in-first-out). Choose the accounting method that best suits your needs.
- Consult a tax professional to help you out with all your Bitcoin taxes.
- Access crypto tax software, such as ZenLedger, to keep records of crypto transactions, portfolio tracking, and generate your tax documents.
The Bottom Line
Bitcoin taxes can be difficult, considering the price volatility of Bitcoin, which makes it all the more difficult to evaluate the cryptocurrency's fair worth in purchase and sell transactions.
It is important to pay close attention to the type of transactions, but don’t make the mistake of avoiding Bitcoin taxes because the IRS will take legal action.
ZenLedger easily calculates your crypto taxes and also finds opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional prepared plans!
Disclaimer: This material has been prepared for informational purposes only and is not intended to provide, tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.