A very important aspect of purchasing cryptocurrency is making sure that you are meeting your correct tax obligations. If you purchased cryptocurrency in the U.S. during the previous tax year, you’ll need to file a tax return with the IRS by the April 18 deadline. Returns submitted after the deadline will attract penalties.
Why Do U.S. Citizens Have To Pay Tax On Bitcoin?
The IRS published a notice in 2014 classifying cryptocurrencies, such as Bitcoin, as property. Because of this, the tax authority views crypto in the same way as stocks. If you make a profit from selling tokens, capital gains tax applies.
The IRS also views payments made to you in the form of digital currencies as income. Therefore, if you received Bitcoin or another token for services or activities you conducted in the previous tax year, you’ll need to include this as part of your income tax calculations.
When Do U.S. Citizens Incur Capital Gains Tax On Bitcoin?
Holders of cryptocurrency in the U.S. may need to pay capital gains tax when:
- Buying goods or services with cryptocurrency. (Trading cryptocurrencies for goods may “realize profits” even if you don’t convert them to fiat first).
- Selling cryptocurrencies for fiat currency, such as USD, GBP or EUR
- Receiving cryptocurrency valued at more than $15,000 in the form of a gift
- Trading one digital asset for another, such as purchasing NFTs with Bitcoin
The IRS considers each of these cases a “taxable event.” You only need to pay taxes on the capital gains you made on these events, not the total amount of assets disposed of.
When Do U.S. Citizens Have To Pay Income Tax On Bitcoin?
The IRS defines several events that create an income tax liability. These include:
- Mining income from transaction fees and block rewards
- Earning interest from decentralized finance lending
- Earning crypto from liquidity pools
- Earning crypto from interest-bearing accounts
- Receiving cryptocurrency as a means of payment for carrying out work
- Receiving cryptocurrency tokens as part of an unsolicited distribution scheme (sometimes called an airdrop)
Unclear Or Undefined Tax Rules
Unlike other asset classes, the IRS treats Bitcoin as both a form of currency and an asset, creating confusion for holders. Income from the cryptocurrency is taxable, like regular fiat, but is then subject to further capital gains taxation when sold, unlike fiat.
The IRS is still developing rules for when Bitcoin activities create a taxable event. For instance, it is not clear whether Bitcoin earned via staking is taxable when earned or sold. Currently, there is an ongoing court case arguing that it should be the latter, not the former. In addition, the IRS has not yet stated whether minting tokens creates a taxable event. If it does, then it would imply that gold miners should also pay taxes before selling their stock.
At present, the best advice is for Bitcoin holders to consult with a qualified accountant when filing their taxes. Overpaying is generally safer than underpaying. And there is always the possibility of receiving a rebate from the IRS in the future.
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