More than a decade after Bitcoin’s introduction, there is still considerable confusion about its taxes. The cryptocurrency was conceived of as a medium for daily transactions but it has yet to gain traction as a currency. Meanwhile, it has become popular with speculators and traders interested in making a quick buck off its volatility.
Depending on the type of transaction, assets are subject to various kinds of taxes. But the unique characteristics and use cases for Bitcoin means that there are several exceptions.
Bitcoin’s classification as an asset makes its tax implications clear. The IRS has made it mandatory for taxpayers to report bitcoin transactions of all kinds, no matter how small in value. Every U.S. taxpayer is required to keep a record of all buying, selling, investing or usage associated with their Bitcoin. The IRS sent warning letters in July 2019 to more than 10,000 taxpayers it suspected “potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.” It warned that incorrect reporting of income could result in penalties, interest, or even criminal prosecution.
The following types of transactions using Bitcoin are considered taxable:
-Sale of Bitcoins, mined personally, to a third party
-Sale of Bitcoins, bought from someone, to a third party.
-Using mined Bitcoins to buy goods or services.
-Using Bitcoin, bought from someone, to buy goods and services
Do I have to pay taxes if I receive cryptocurrencies as payment for goods and services?
Salaries or payments received in cryptocurrencies are treated as ordinary income for tax purposes. The value or cost basis for the cryptocurrency is its price on the day at which it was used for salary payment.
Do I have to pay taxes if I am a Bitcoin miner?
Yes. Cryptocurrency mining is considered a taxable event. The fair market value or cost basis of the coin is its price at the time at which you mined it. The good news is that you can make business deductions for equipment and resources used in mining. The nature of those deductions differs based on whether you mined the cryptocurrencies for personal or individual gain. If you run a mining business, then you can make the deductions to cut down your tax bill. But you cannot make these deductions if you mined the cryptocurrencies for personal benefit.