This time of year is here again. As the new year approaches, it’s time to start assembling our tax records. Isn’t this exciting? Things get much more exciting if you’ve bought in or sold bitcoin.
The following information is intended to assist you in understanding the most crucial components of bitcoin tax filing. As a reminder, this only applies to taxes in the United States (though U.K. regulations are very similar).
You need to know this:
WHERE DO I START WITH THIS BITCOIN THING?
True, exactly like stocks, bonds, or real property. However, it is not taxed as a currency since it is so widely accepted. If you sell, spend, or trade any amount of bitcoin, you will be subject to taxation on the sale. If you don’t give your bitcoin to someone, you’ll have a capital gain or loss every time you sell it.
You’re thinking it, too. So, at least I know what’s going through my head: This demands a great deal of meticulous documentation. This information is necessary for calculating capital gains and losses. The cost basis of your transactions will no longer be reported to you on a regular basis by crypto exchanges. Keep track of your coins and their original values if you’ve relocated them or taken them into your own hands. You know what? Excel would be perfect. And make sure you’re always up to date. Your tax accountant is going to be happy with you.
BITCOINS OBTAINED THROUGH MINING MAY BE SUBJECT TO TAX
Every bitcoin you earn from mining is subject to regular income taxation if you are an individual. Don’t be deceived by the phrase “ordinary. Long-term capital gains are taxed at lower rates than ordinary income. Holding an asset for a year or more is considered “long term” in the United States.)
This means that you’ll have to pay social security and Medicare taxes on top of any standard income taxes, as mining is also treated as self-employment income.
This means that you may write off all of your mining-related expenditures, such as energy, which is a significant one. In some situations, the whole cost of the mining rigs might be deducted in the first year of operation. You can’t beat that.
When it comes to reporting income in US dollars, how do you figure out how much you’ve earned? According to the IRS standards, the fair market value of your mined bitcoin should be included in your gross income. As a result, each day brings in more money. We have another fantastic Excel spreadsheet chance to take advantage of now.
To avoid paying self-employment taxes like social security and Medicare, you may now record the money you make mining bitcoin as “other income” on your tax return. The drawback is that you won’t be able to deduct any of your costs from your earnings. If you’d like to deduct your costs, you’ll need to fill out IRS Schedule C.
If you declare mining revenue, you now have a cost basis for the coins that you may deduct from future capital gains — which means you’ll have to keep additional records.
THE QUESTION ON TOP OF FORM 1040. HOW TO RESPOND TO IT
Bitcoiners who want to file their tax returns in 2021 should be aware of the following information from a competent tax counselor.
The “crypto question” on the 2021 Form 1040 looks like what you see above. Be aware that the inquiry in 2020 also asked about “sending” any cryptocurrency. “No” is the answer if you just bought bitcoin in 2021.
How much virtual money did you own, swap, or otherwise dispose of at any point in time during the year 2021?
So, are you obligated to provide an answer? Yes, and your response should be truthful. Is there a chance you’ll be audited as a result? Since alone, I doubt it. In recent years, 45 percent of taxpayers earning between $75,000 and $200,000 were audited. It’s possible that the IRS may review your tax return and notice that some bitcoin transactions have been reported, including capital gains and mining income.
Paying using BITCOIN or receiving payment in BITCOIN are subject to tax.
Self-employment income is taxed if someone pays you in bitcoins for your services. On the day of payment, the value of the coins you got is shown in your income. As with mining, you’ll have a cost basis for the coins you’ve just created.
In the same way, if you use bitcoin to pay for someone else’s services, you’ve simply given up some coins. As a result, the transaction results in either a profit or a loss for you.
STARBUCKS TRANSACTIONS MADE WITH BITCOIN ARE TAXABLE.
Since bitcoin transactions are taxed each time they are made, you should avoid using it to pay for Starbucks beverages. For a transaction that is so little, you ask, “Is there an exemption to the rule of de minimis?” That’s not possible at the moment.
Having a property that functions as a currency and a currency that functions as a property is an issue. There is currently no taxation system that is user-friendly enough to manage all Bitcoin transactions.
It’s possible to deduct the costs of trading Bitcoin, however…
Gains from bitcoin, stocks, real estate, or any other type of property might be countered by losses incurred in trading such assets. That’s excellent news, and it’s something to celebrate. Whether you’ve made money in stocks, but lost money in bitcoin, you can make up the difference.
Your losses may be bigger this year if you had no profits to balance them or if your losses were greater than your gains. Capital losses that are greater than your earnings can be deducted by taxpayers up to a maximum of $3,000 per year. You may be thinking, “That’s not much,” and I agree. You can, however, deduct these losses from future earnings by carrying them forward.
It is taxed when you trade Bitcoin for another cryptocurrency.
Two plots of real estate are traded for one another in a like-kind transaction. For cryptocurrencies, like-kind exchanges are not permitted. When the second asset is sold, the seller can avoid paying capital gains taxes on the profit.
Is it necessary for Bitcoin exchanges to report transactions to the Internal Revenue Service (IRS)?
Stock brokers report asset sales in a similar fashion to cryptocurrency exchanges. Even if you don’t realize a profit on a stock or mutual fund sell, the IRS requires you to declare the transaction on your tax return. There is a lot of gray area when it comes to bitcoin exchange tax filing right now. In addition, the US government is eager to get its hands on this issue.
According to Coinbase, the largest US-based exchange, the 1099-K and 1099-B forms will not be issued for bitcoin sales. As a result, the IRS receives no part of your sales revenue. Your cost basis and all of your sales revenues must be reported by you alone. Only transactions above $600 are reported by Coinbase, and they include awards or fees you may have received throughout the year. Form 1099-MISC is used to report this information.
Gemini’s approach is radically different. ‘ For some transactions, the corporation considers itself a third-party settlement organization (TPSO) and files Form 1099-K. (To record money received to merchants, merchant services providers often file a 1099-K.) In order for Gemini to report on your digital asset sales, you must have made at least 200 transactions and earned at least $20,000 in profit.
Due to the fact that it is headquartered in Malta rather than the United States, Binance does not file tax returns with the Internal Revenue Service (IRS). Traders who received a Form 1099-K from Binance were already aware of this.
BITCOIN DONATIONS TO CHARITIES ARE NOT TAXED IN GENERAL.
Despite the fact that you’ve disposed of your bitcoin by making a donation to a charity, you won’t be liable for any taxes on the sale, even if the coins’ value has increased. Even better, you may be able to claim a charitable deduction in the amount of the fair market value at the time of the donation – a win-win situation. You can’t say that very frequently with regards to taxes.
If you receive bitcoin as a present, congratulations. As if that wasn’t enough, you won’t have to pay any taxes on the purchase. Your cost basis will be the same as the individual who gave you the coins in the future when you dispose of them. As a result, a little of communication is required.
The Ten Most Important Things to Keep in Mind
With bitcoin, taxation may be a real headache. Here are a few key things to keep in mind:
- Every time you sell bitcoin, you’re subject to tax.
- Keep meticulous records of all purchases and sales.
- Your bitcoin exchange isn’t going to provide you with a slick annual report.
- Consult an accountant who is familiar with the Bitcoin ecosystem for tax advice.