Many people who have already jumped onto the “Bitcoin Bandwagon” and those who are interested in riding in it have one simple question – is bitcoin taxable?
In the case of the United States, the answer is yes. Using Bitcoin as a medium of exchange and investment has tax implications. Still, there seems to be confusion when it comes to US Bitcoin taxation, and how to report income from Bitcoin transactions to the IRS.
Here’s a simple guide to help clarify frequently asked questions concerning US Bitcoin taxation.
Table of Contents
What is Bitcoin?
Bitcoin is a type of digital currency based on a decentralized distributed digital ledger known as Blockchain. Anyone who owns Bitcoins has a digital wallet where this cryptocurrency is stored, and that person can transfer it to someone using a mobile app. There’s no need for a middle-man like a banking institution to conduct such transactions.
Nowadays, Bitcoin is the most widely circulated cryptocurrency. It’s now used to pay for goods or services, or investment. In fact, Bitcoin has now an equivalent value in government-issued currencies like US dollars.
IRS Treatment of Bitcoin and other Cryptocurrencies
In 2014, the US Internal Revenue Service (IRS) has issued a reminder to taxpayers to report any income from digital currency transactions on their income tax returns.
The IRS treats Bitcoin and other convertible virtual currencies as property. This treatment means general tax principles concerning property also apply to digital currencies that can be purchased, sold, and traded digitally. Here are some instances where Bitcoin is taxable:
- If someone held Bitcoin as a capital asset, any gain or loss from the sale and exchange of that asset is taxable as a capital gain or loss. Bitcoin held as capital assets are subject to bitcoin tax rate depending on how long you held it. The tax rate differs in every country, such as India, UK, and Canada. In the USA, keeping Bitcoin for more than one year before a successful sale is subject to more favorable long-term capital gains rates.
- Employers who pay their employees using Bitcoin should file an employee earnings report to the IRS. Bitcoin value must be converted to US dollars as of the date of each payment.
- Self-employed individuals who earned income from Bitcoin sales transactions should also convert its value into US dollars as of the current exchange rate of the date of the transaction, and report the same to the IRS.
- Miners who earn Bitcoin or any virtual or real currency from validating Bitcoin transactions and performing maintenance of the public digital ledger must report such earnings as gross income to the IRS. Gross earnings of self-employed Bitcoin miners are subject to self-employment tax.
Penalties for Failure
Anyone who fails to report the profit or income from digital currency transactions properly can be subjected to a tax audit and can be liable for penalties and interest when deemed responsible for any violation of the tax law.
For instance, the IRS can file criminal charges, such as filing a false tax return or tax evasion cases, to delinquent taxpayers.
Conviction from filing a false tax return case can land a person to a prison term of up to three years and a fine of up to $250,000. A person convicted of tax evasion, on the other hand, has to serve for five years in prison and pay a fine of up to $250,000.
Takeaway
Now you know the fundamental elements of US Bitcoin taxation. So, if you are using this digital currency for trade and exchange, you should make sure to file an income tax return of your transactions for you to avoid any penalties from the IRS.