Taxation of bitcoin and other cryptocurrencies is pretty similar to the way you pay taxes on any other type of investment. And regulators are slowly but surely making it harder and harder to evade this type of tax.
You pay capital gains taxes when you sell a cryptocurrency like Bitcoin, whether you harvest into dollars or any other currency.
If you had held the cryptocurrency for less than a year, the sale is taxable as income tax; hold it for more than a year before selling it, and you pay the capital gains tax rate, which is lower.
How to Pay Taxes on Bitcoin
The only thing related to cryptocurrency that you need to report to the Internal Revenue Service concerns sales of cryptocurrency into any other currency you get to declare a loss or gain.
(If you own any cryptocurrency funds and they paid dividends, you’d have to pay taxes on those dividends but it’s highly unlikely that a crypto fund would be paying dividends anytime soon.)
You report this activity in Schedule D of your tax return. Input the difference between what you paid for the currency and what you sold it for. If you made money, it’s a capital gain. If you lost money, it’s a capital loss.
The IRS Always Knows
Like it or not, the IRS will eventually get wind of your crypto trading profits, as it is now privy to information from any U.S. exchange you might have transacted on; the agency essentially won the right to this data in court in November.
Spare yourself the interest and penalties you might end up owing from attempting to not report capital gains on cryptocurrencies. The IRS typically takes at least six months to catch up on nonpayments, so you’ll end up owing extra money as interest or penalties.
And even if you did a cryptocurrency transaction on a site that is not based in the U.S., and move the funds into a currency other than the dollar, these sites aren’t immune to the tax treaties that the IRS has already been brokering with foreign countries.
It might take longer for the IRS to obtain information on activities on foreign sites, but eventually, the prevailing trend in the IRS’ fact-finding will play out here as well.
Although cryptocurrencies’ origins included a lack of real taxation on them — and policies to support that — slowly but surely regulators around the world are making it harder for people to dodge this type of tax.
For more information on how the IRS handles cryptocurrencies, click here.
Readers, are you still confused about whether there are taxes on bitcoin or other cryptocurrencies?