Do you have to pay taxes on bitcoin profit?
Donald Bitcoins & Taxation
Around the world, tax authorities have tried to bring forth regulations on bitcoins. The U.S. Internal Revenue Service (IRS) and its counterparts from other countries are mostly on the same page when it comes to the treatment of bitcoins.
The IRS has said that the bitcoin should be treated as an asset or an intangible property and not a currency as it is not issued by a central bank. Bitcoin's treatment as an asset makes the tax implication clear.
The federal agency said in July 2019 that it was sending warning letters to more than 10,000 taxpayers it suspects "potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly." It warned that incorrect reporting of income can result in penalties, interest, or even criminal prosecution.
The IRS has made it mandatory to report bitcoin transactions of all kinds, no matter how small in value. Thus, every U.S. taxpayer is required to keep a record of all buying, selling of, investing in, or using bitcoins to pay for goods or services (which the IRS considers bartering).
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Because bitcoins are currently being treated as assets, if you use bitcoins for simple transactions, such as buying groceries at a supermarket, you will incur a capital gains tax (either long-term or short-term depending on how long you held the bitcoins). When it comes to bitcoins, the following are different transactions that will lead to taxes:
- Selling bitcoins, mined personally, to a third party
- Selling bitcoins, bought from someone, to a third party
- Using bitcoins, which one may have mined, to buy goods or services
- Using bitcoins, bought from someone, to buy goods or services
Scenarios one and three entail mining bitcoins, using personal resources, and selling them to someone for cash or equivalent value in goods and services. The value received from giving up the bitcoins is taxed as personal or business income after deducting any expenses incurred in the process of mining.
Such expenses may include the cost of electricity or the computer hardware used in the mining of bitcoins. Thus, if able to mine 10 bitcoins and sell them for $250 each, you have to report the $2,500 as taxable income before any deductible expenses.
Scenarios two and four are more like investments in an asset. Let’s say bitcoins were bought for $200 each, and one bitcoin was given up in exchange for $300 or an equivalent value in goods. The investor has gained $100 on one bitcoin over the holding period and will attract capital gains tax (long-term if held for more than one year) on the excess.