Since cryptocurrencies are relatively new and are on the fringes of the financial world, it has led to a lot of confusion about how to treat them. Now that they have become a mainstream currency that is accepted for goods and services, it is more clear that they have to be taxed.
It has been classified as an asset rather than a currency by the IRS so that affects how it should be taxed. There is some gray area still that has made some people confused about what to do about their Bitcoin when it comes time to pay their taxes. For instance, unlike some assets, you can sell Bitcoins instantly.
In this article, we will try to clear up any confusion about how having and using Bitcoin so you can do your taxes properly.
Not a currency
Since Bitcoin and other cryptocurrencies have not been issued by any central bank, the IRS doesn’t consider it as a currency. Whether or not this is a good or bad decision, it is perplexing. It is, instead, considered an asset. Yet, many assets cannot be used for transactions the way Bitcoin is.
Can you use a portion of your home’s value to buy a pizza? Even if you could, would that be a good idea?
Bitcoin can be used to pay for things in the same way that you would use a credit card.
Where this gets very complicated is that every transaction you make with your Bitcoin is about an asset. So, when you buy that pizza, you are susceptible to a capital gains tax that needs to be paid. And how much to pay will depend on how long you had had those coins and how much value they had accrued in that time.
All transactions count
You will need to keep very good records of your entire history with your coins since every transaction is subject to being taxed. From the purchase to any time you use them to buy something.
Also factoring in to how they can be taxed is how they were acquired. If you mined the Bitcoins and then sold them to a third party or used those coins to buy a product or service, then you would have to account for the value received as business income. You can deduct any expenses incurred from the mining of these, however.
If you have bought the Bitcoin, waited for it to increase in value and then either sell it or use it to buy something, then the profit you made from it is considered a capital gain. If it was held for over a year, then it is a long term capital gain.
It is definitely a good idea to consult with a tax professional as it can be very difficult to come out ahead in these scenarios. Because of the volatility in any cryptocurrency, it is hard to place a fair value on any of your purchases or gains.