how to pay taxes on bitcoin trading

Bitcoin is an unregulated, decentralized digital currency that has risen to fame in recent years. It's also one of the most volatile assets on the market. Despite its lack of regulation and volatility, you still need to pay taxes on bitcoin trading profits. This post provides an overview of how Bitcoin is taxed and How to Pay your Taxes on Bitcoin.


How is Bitcoin Taxed?

Virtual currencies such as bitcoin are taxable. That means that all of your transactions with it must be reported on your tax return.


The IRS does not care about where you get bitcoin. When you sell it, you have to report the money and the profit or loss on your tax return.


Bitcoin is a type of money that can be used to buy things. It is sometimes hard to tell how it is taxed. Here are some points about taxes for bitcoin:

  • Bitcoin is property, not currency. One of the first things to know about virtual currency is that the IRS treats it as property. Virtual currencies are not treated as currency for tax purposes; instead, they're treated like stocks - which means they're taxed in a manner similar to stocks.
  • How you obtain Bitcoin is important for taxes. How you got and how you use Bitcoin also impact the taxes you pay. If you mine bitcoins, it creates a taxable event. You need to calculate the fair market value on the day that it was mined and then pay taxes for that amount.
  • Reporting to the IRS. The IRS says that you should keep records of your digital currency's receipts, sales, exchanges, or other dispositions. You also have to be aware of the fair market value at the time of each transaction in order to calculate your taxes.

How to Prepare Your Bitcoin Tax Filing

When tax season starts, everyone worries about paying taxes and filling out their returns. They also have to work on getting records ready for the next financial year. People who do business in bitcoins are worried too.


The IRS is watching for people who don't pay the taxes. They will review their taxes, and when they find something wrong, they will tell you. If you owe money, you need to pay it back, and if you don't have enough money, the IRS can take it from your bank account.


Some people are surprised to find taxes for cryptocurrency. But it's important to know that taxes will still happen, regardless of what you do with your cryptocurrencies.


Before filing taxes for people who have bought or sold cryptocurrencies, check these important points.

Bitcoin Record-Keeping

There are many brokers, intermediaries, and exchanges that offer cryptocurrency trading. But not all of them give tax reports to people who trade. For instance, Coinbase does give information on what someone settled for something.


In the end, it is imperative that an individual keep records of their cryptocurrency transactions for personal taxation purposes.


Any transactions involving bitcoins are potentially subject to tax. If you, for example, bought five Bitcoin five years ago, then spend one bitcoin four years ago on coffee, and then spend two more Bitcoins buying goods from an online portal three years ago. The last two Bitcoins were spent the previous month-selling them at the same time for dollars- every time you trade bitcoins, you should know the dollar value of it. You will need to pay taxes on them.

Reporting Bitcoin Income

Income from bitcoin dealings is found in Schedule D, which is an attachment of form 1040.


Depending on the type of dealing that generates revenue—ordinary income or capital gain—the income will be reported under the correct category in the appropriate columns of this form.


When Do You Have to Pay Taxes on Bitcoin?

The IRS says that Bitcoin is considered property and will be taxed as such. If you are paid in Bitcoins, then the fair market value needs to be included in your income. You also need to list transactions in U.S. dollars instead of Bitcoins if you use virtual currency.


If you sell your Bitcoin, you can either have a gain or a loss. This is because Bitcoin is a property for taxes. A gain represents income, and though the IRS is still discussing how to handle cryptocurrency transactions, they're considering that any amount received should be taxable.


If you use bitcoins, you will have to calculate how much money you gained or lost every time you spend them on something.


Bitcoin is a type of asset that you acquire and then dispose of, often by trading it. A capital gains tax may be due at this point in the process.


When a property is disposed of, here's what happens:


  • Income is obtained from any capital gain.
  • Gain is the variance between the purchase price and what you get from selling it.
  • The tax rate that applies depends on how long you hold the property. If you buy it and sell it in less than a year, you will pay a higher tax rate. This is called a short-term gain. If you purchase and keep it for more than one year, you will have to pay less in taxes because this is a long-term gain.
  • Your disposition of property is reported on your tax return. You will use Schedule D and form 8949 or form 4797. This requires you to calculate the capital gain or loss. You will do the calculations on your form, following instructions.

Tax Tools for Bitcoin

Some people who use Bitcoin might want to keep it safe. They should use a wallet provider that has risk-mitigation tools such as security features. This will make buying, trading, and selling Bitcoin more secure and user-friendly. Investors can also look at providers with the kind of security features that one would expect from a bank institution if they want to be more hands-off.


This might come in handy at various stages of the process while handling transactions or when planning for taxes.


BitcoinTaxes is a web-based software that can help import data and calculate gains/losses from Bitcoin holdings. It's helpful if you're hunting down some kind of tax relief or if you're trying to make sure that your Bitcoin holdings are all accounted for.


It's also a way of being prepared if the IRS decides to target cryptocurrency owners - it will be easier to get organized since everything is tracked individually.


How to Pay Taxes on Bitcoin

If you want to buy Bitcoin, make sure you keep track of when you buy and sell it. You need to keep records of what your cost basis is, as well as the exchange rate. When you sell Bitcoins, record them on Schedule D and Form 8949.


Use normal tax reduction strategies: You can use your losses to offset gains and time your dispositions to qualify for long-term treatment. A professional can help you with these concepts.


Transactions in Bitcoin are taxable and must be reported on the tax return provided by the IRS.


What Happens If You Don't Pay Taxes?

It's hard to believe that you can shrug your shoulders at the IRS and not pay, even if they didn't know about it. All Bitcoin trades are stored in a public network that the U.S. government easily accesses, so there's no way for people to get away with this tax evasion scheme without getting caught eventually.


Without a doubt, you'll receive a notice from the IRS if you disregard paying taxes on this income. You'll be charged interest at 5% monthly as of 2020. You'll also get penalized at the rate of 0.5% of the amount of tax you owe, up to a cap of 25%.


The IRS has many ways to collect money. They can put a lien on your property, take money from your bank account or income.


Summary

While Bitcoin may be an unregulated asset, and transactions are not regulated by governmental entities, it doesn't mean that the IRS isn't interested in your trading activity. In fact, all of your bitcoin transactions must be reported on your tax return because they're considered taxable.


It's important to keep detailed records of transactions in virtual currency because it ensures that your income is measured accurately. This way, you can be sure the IRS will not come after you for any irregularities on their tax return.

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