When compared with conventional solutions, investing in Bitcoin is more secure because it deploys encryption to eliminate fraud and hacking. BTC has been incorporated into traditional financial markets and sees participation from retail and institutional investors; rewind the clock a couple of years ago, and very few investors were talking about Bitcoin like we are today. Have you invested in Bitcoin? What happened? Everyone has the same opportunity to acquire wealth. Even though it’s a highly volatile asset, BTC can help you build wealth, mainly if you invest over the long term. To our knowledge, the best way to buy Bitcoin is Binance, which offers trading services in several countries in the Americas, Europe, Asia, and others.
In case you didn’t already know, in case you’ve experienced capital gains or losses from your investments, you must report them in your taxable accounts. Bitcoin transactions are pseudo-anonymous, but keep in mind that the “taxman” can uncover them via exchange-provided forms. Previously, the IRS has collaborated with blockchain analysis firm Chainanalysis to examine transactions on Bitcoin (and Ethereum). If you don’t include BTC in your tax filing, the tax authority will find out and possibly impose fines and penalties. Maybe you’re looking to simplify the process. In that case, you can use crypto tax software to avoid liability.
1 In The United States, Bitcoin Is Treated as Property
Since 2014, the IRS has treated cryptocurrency as property for federal income tax purposes. This basically means that anytime you sell or exchange Bitcoin, it’s a taxable event, i.e., it can result in taxes paid to the government. Taxable income (gains or losses) can result from transactions such as:
- Selling BTC for fiat currency & direct transfer to debit/credit card
- Exchanging BTC for property, goods, or services
- Exchanging or trading BTC for another cryptocurrency
- Receipt of BTC as a result of mining activities
- Receipt of BTC as a result of airdrop
Regardless of whether you’re trading Bitcoin as an individual or a business, keep hold of all the records and receipts relating to your transactions, including all fees paid. There are no tax implications for buying BTC, but you must determine the fair market value at the time and date of the transaction to determine its value.
If you’re not already a Bitcoin investor, choose a cryptocurrency exchange, set up an account, and decide on a payment method. When you’re up and running, you can purchase Bitcoin. There’s no tax for giving BTC under a certain amount. To be more precise, you can give cryptocurrency as a gift, transferring it through an exchange. The recipient must provide you with their wallet address, similar to a QR code. Attention must be paid to the fact that the transfer of Bitcoin as a gift implies the filing of Form 709 used to allocate generation-skipping tax exemptions when transferring property to someone unrelated by blood, marriage, or adoption.
2 Calculate Your Bitcoin Taxes for Gains and Losses
Every time you dispose of your Bitcoin, you incur capital gains or losses, so observe how the price of BTC has changed since you initially acquired it. You need a simple formula to calculate capital gains or losses: subtract the cost basis from the sales proceeds. The sales proceeds represent the overall amount of money received to sell the BTC, while the cost basis is the overall amount paid to buy that digital asset. Many transactions involve fees paid to exchanges or protocols; in some cases, they can be added to Bitcoin’s cost basis to decrease your capital gains or increase your capital losses.
Once you’re done with your calculations, you can report your gains or losses using Form 8949, which you can view by logging into your account and selecting the Summary/Print tab from the navigation menu. It’s crucial to complete as many pages of the form as necessary to report your cryptocurrency transactions – the totals will be transferred to Schedule D. Information required includes the description of the digital asset, the purchase price, the purchase date, the selling price, and the selling date. If you resort to filing software such as TurboTax, you don’t have to fill in the form yourself because the app does the hard work for you.
3 What’s The Simplest Way to Minimize Your Tax Burden?
If you owe it, you can’t avoid paying taxes, but there are some ways you can minimize your tax burden. For example, you can leverage unrealized losses; maybe Bitcoin has decreased in value since you acquired it, but you haven’t realized that loss because you’ve been holding onto your digital assets. The question now is: Why does this matter? Well, you can reduce your tax bill. The simplest way to legally avoid paying taxes is to hold onto BTC for the long term. HODLing means you buy Bitcoin, wait, and reap its benefits – you keep the entire capital indefinitely. HODL helps you resist the fear of missing out (FOMO) that can occur from time to time.
Navigating the tax code on your own is challenging, to say the least, so take into account the possibility of hiring a certified public accountant (CPA). Indeed, it’s an expensive route to take, but you’ll immediately understand that a quality accountant is well worth the money. Even if it might seem extreme, you can move your cryptocurrency holdings to a country with more favorable tax rates. New Hampshire, Alaska, South Dakota, Florida, Tennessee, and Washington are just a few examples of countries with no income taxes. Needless to say, some countries apply harsher tax rates and additional charges.
All in all, you must report and pay taxes on Bitcoin transactions that result in a taxable event with gains or losses. The IRS treats cryptocurrency like property, not currency, meaning the rates are equal to capital gains or losses for stocks. Gains or losses aren’t realized until you sell, exchange, or spend BTC, so if you simply purchased tokens, there’s nothing to worry about. Moving to another country not to pay taxes is a bit of a stretch, so you’re better off making gifts to family or donations to charity.