Taxes on Bitcoins: What, When and How?

In December 2017, Bitcoins were trading for almost $20,000, but over a year later, they went into a downward spiral. Since then, some crypto traders have moved on to investing in less volatile types of digital currency while some still hold on to Bitcoins hoping to cash in on its 2nd-time try at the rise to the top.

The 15th of April, known as ‘tax-day’ is when the United States tax returns are due. US citizens are required to file income tax returns and report their crypto activity to the Internal Revenue Service (IRS). For citizens living outside the United States, they receive an extension of 2 months which goes up to 6 months.

In the past 2 years, the IRS has enforced stricter guidelines for regulating taxes on Bitcoin. Their freshly drafted Schedule 1 form, used by taxpayers to report additional income and deductions, starts off with a question, “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” If your answer is yes, then you will be obligated to file a crypto tax report. 

How to Calculate Bitcoin Taxes?

If you run a business or have obtained capital gains higher than $1,000, you are required to file your tax reports every quarter. To do that, you need to keep in mind the following. 

Calculating Capital Gains and Losses

Selling and exchanging Bitcoins does incur gains or losses which includes activities:

  • Trading in Bitcoins for other cryptocurrencies (For Example: When selling BTC for ETH).

  • Trading in Bitcoins for fiat currency. 

  • Crypto traders holding Bitcoins as an investment.

  • Crypto traders holding Bitcoins for business purposes (Running a Bitcoin kiosk).

A capital gain is a profit when a capital asset is sold or realized, (stocks, bonds, mutual fund shares or property). The basis for calculating capital gains is the original price of the asset with any related transaction fees.

Calculating Bitcoin Tax Rate on Capital Gains

Depending on which tax bracket you fall in, long term capital gains are generated when a Bitcoin is held for more than a year and can be taxed at a rate of 0%, 15%, or 20% respectively. Short term capital gains are generated when Bitcoins are held for less than a year and sold for a profit, these gains are taxed according to your ordinary income tax rates.

Calculating Last In First Out (LIFO) or First In First Out (FIFO)

When crypto traders and investors sell multiple crypto assets with different basis, they can choose to sell the cryptocurrency they have held onto the longest first, or sell the newest ones first. 

When are Bitcoins taxable?

If your Bitcoin activity is of the following in nature, you are liable to pay tax on your Bitcoin transactions.

  • Purchasing products and services using Bitcoins.

  • Purchasing Bitcoins with another type of cryptocurrency.

  • When selling Bitcoins.

  • When trading or exchanging Bitcoins.    

When Bitcoins Received as a Gift

When received as a gift, if the Bitcoins were held over a duration and later sold, you are liable to pay taxes on your Bitcoins for any gains that might have occurred at the time of realization.

When Bitcoins Received as Income

When received as income, you need to declare the value of the amount received in Bitcoin and its monetary value as ordinary income and should be converted at the exchange rate of the US dollar on the date the Bitcoins were received.

What are the best Calculators for Bitcoin Taxes?

CoinBase

One of the major cryptocurrency exchanges, Coinbase has enabled a new crypto tax calculator. Made to simplify capital gains and losses calculations for crypto taxpayers and is based upon the IRS’ new accounting method. 

This calculator can make the preparation and filing of income tax returns less stressful. However, it only applies if the cryptocurrency transactions like Bitcoin were carried out on CoinBase. 

CoinBase Supports 4 types of cryptocurrency, Bitcoin, Ethereum, Bitcoin Cash and Litecoin. Crypto traders who use other exchanges will need to perform calculations through other means (crypto tax software). 

BitcoinTaxes

A simple and handy tax calculator, BitcoinTaxes can complete your capital gains report with details like the cost-basis on every transaction, sale proceeds and gains. An income report with calculated mined values, cost basis information for gifts on a donation report if needed and a closing report with net profit and loss and cost-basis evenly listed with detailed calculations. 

Depending on your preferences, different cost-basis calculations can be used. BitcoinTaxes also lets you import your crypto data seamlessly. There is no official BitcoinTaxes app for Android or iOS. However, the website is very well optimized to support all mobile devices. 

ZenLedger

ZenLedger has aided many crypto traders with their tax reports. They have some of the most simple calculating tools for use and are able to keep a record of all your transactions that span across dozens of exchanges and digital wallets. 

ZenLedger goes a step further by providing you with features such as tax-loss harvesting, Schedule D, Form 8949 and a highly comprehensive view of all your transactions, called Grand Unified Accounting.

This Grand Unified Accounting ensures the Bitcoin taxpayer and their CPA have complete control over each line, allowing you to see each calculation precisely in your tax report.  

ZenLedger is a completely transparent system guaranteed to make your Bitcoin calculations error-proof and your tax-paying process as easy as a walk in the park. 

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