Bitcoin Tax: Are Your Crypto Investments Taxable?

Bitcoin is a cryptocurrency that has gained popularity as a medium for daily transactions and among speculators and traders interested in its volatility. However, its taxation has been a complex issue due to its unique characteristics and evolving tax legislation. The Internal Revenue Service (IRS) treats Bitcoin and other cryptocurrencies as property or capital assets, which means any gains or losses from selling, trading, or paying with Bitcoin are generally subject to capital gains taxes. The tax rate depends on the duration of ownership, with higher rates for shorter holding periods. Additionally, mining Bitcoin or receiving it as payment for goods or services has tax implications, and careful record-keeping is essential for accurate reporting.

Bitcoin is taxed as property

• Capital Gains Taxes: When you sell or trade bitcoin, you may be subject to capital gains taxes. The tax rate depends on how long you held the bitcoin and your income level. If you owned the bitcoin for more than a year, it is considered a long-term capital gain and the tax rate is between 0% and 20%. If you owned it for less than a year, it is considered a short-term capital gain and is taxed as ordinary income, with rates ranging from 10% to 37%.
• Timing of Taxes: You only owe taxes on bitcoin when you sell, trade, or otherwise dispose of it. Simply holding bitcoin does not trigger any tax liability. However, if you receive bitcoin as payment for goods or services, that is considered taxable income and you will owe taxes on the fair market value of the bitcoin at the time of receipt.
• Reporting Requirements: Cryptocurrency transactions must be reported on your tax return, specifically on IRS Form 1040. You must disclose any transactions involving bitcoin, including buying, selling, trading, or using it to purchase goods or services. The IRS has added a specific question about cryptocurrency transactions on the front page of Form 1040 to ensure compliance.
• Record-Keeping: It is important to maintain detailed records of your bitcoin transactions, including the dates and amounts of purchases, sales, and any other dispositions. This information is necessary for accurately calculating your tax liability and reporting it to the IRS.
• Tax Planning: There are tax planning techniques that can help minimize your tax burden on bitcoin gains, such as holding bitcoin for the long term to qualify for lower long-term capital gains tax rates. Additionally, if you incur losses on bitcoin transactions, you may be able to deduct those losses from your taxable income, up to a certain limit.

In summary, the tax treatment of bitcoin as property by the IRS has significant implications for investors. It is important to understand these implications and consult with a tax professional to ensure compliance with the relevant tax laws and regulations.

Capital gains taxes on bitcoin

The Internal Revenue Service (IRS) treats Bitcoin and other "convertible virtual currencies" as property, specifically a capital asset, rather than a currency. This means that buying, selling, or trading Bitcoin triggers tax consequences similar to those of owning and trading stocks or exchange-traded funds (ETFs).

When to Pay Capital Gains Taxes on Bitcoin

If you invest in Bitcoin and then sell or trade it for a higher price than you bought it for, you owe capital gains taxes. If you use Bitcoin to make a purchase, this is also considered selling, so you will have to pay capital gains taxes if the Bitcoin you own is worth more than what you initially paid for it.

If you are paid in Bitcoin for goods or services, you must include the fair market value of the Bitcoin in U.S. dollars in your gross income. Transactions using virtual currency should be reported in U.S. dollars, too.

Calculating Capital Gains Taxes on Bitcoin

The tax rate that applies depends on whether the property was held for one year or less (a short-term gain) or for more than a year (a long-term gain).

For short-term gains, the tax rate ranges from 10% to 37%, depending on your income level. For long-term gains, the tax rate can be 0%, 15%, or 20%, again depending on your income level.

Reporting Capital Gains Taxes on Bitcoin

You will need to report gains or losses to the IRS through a Schedule D (1040) form if you have either:

• Used Bitcoin to buy goods
• Received Bitcoin as payment
• Traded or sold cryptocurrencies

Additionally, the IRS has added a question to tax return forms asking filers about their crypto activity. As of 2023, the question reads: "At any time during 2023, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"

You can answer "no" to this question if your only transactions involved buying digital currency with real currency, and you had no other digital currency transactions for the year.

Minimizing Capital Gains Taxes on Bitcoin

One way to minimize capital gains taxes on Bitcoin is to hold it for more than a year before selling. Because short-term capital gains taxes are higher, you will pay higher taxes if you sell and realize a gain within a year.

Reporting cryptocurrency on tax returns

The IRS treats cryptocurrency, like bitcoin, as a capital asset. This means that you may have to pay capital gains taxes on bitcoin transactions, whether you are selling it or making purchases. If you are selling bitcoin for a profit, you are taxed on the difference between your purchase price and the proceeds of the sale. This also includes exchanging bitcoin for another cryptocurrency or using bitcoin to pay for goods or services.

Cryptocurrency transactions must be reported on your individual tax return or IRS Form 1040. If you engage in any transaction involving cryptocurrency, you must check the appropriate box next to the question on virtual currency, even if you received it for free. However, if your only transactions involved buying digital currency with real currency and you had no other transactions for the year, you can answer "no" to this question.

If you invest in bitcoin and then sell or trade it for a higher price than you bought it for, you owe capital gains taxes. If you own bitcoin and use it to make a purchase, that is also considered selling it, so you will have to pay capital gains taxes if the bitcoin you own is worth more than what you paid for it. If you are paid in bitcoin for goods or services, you must include the fair market value of the bitcoin in US dollars in your gross income. Transactions using virtual currency should be reported in US dollars, too.

Four things may happen if you sell, trade, or no longer own your bitcoin:

• Income is realised from any gain.
• Gain is measured by the change in the dollar value between the cost basis or purchase price and the gross proceeds received from the disposition or the selling price.
• The tax rate that applies depends on whether the property was held for one year or less (a short-term gain) or for more than a year (a long-term gain).
• Disposition of property is reported on your tax return using Schedule D and Form 8949 or Form 4797. These forms require that you show your calculations when you're working out a gain or loss.

For most individuals, the long-term capital gains tax rate for bitcoin held for at least a year is between 0% and 20%. Some individuals may be subject to a net investment tax if they sell their bitcoin or use it as payment for goods and services.

If you “mine” for bitcoin, the IRS views this activity as employment, with the profits taxable as self-employment income. If your state has income tax, any losses or gains will also be subject to state tax.

How to stay out of trouble with the IRS

As cryptocurrency becomes more mainstream, bitcoin gains will likely be more heavily scrutinized by the IRS. It is important to recognize that crypto tax events are subject to worldwide income tax for US residents and citizens, regardless of where the crypto originated or where in the world you purchased goods using crypto. If you are buying or trading cryptocurrency on a foreign exchange and own over $10,000 in assets, it may be worth speaking with a financial professional who specializes in cryptocurrency.

Reporting crypto taxes in Australia

The ATO has stated that Australian taxpayers need to pay taxes on their crypto and declare their crypto gains and income as part of their annual tax return by 31 October 2024. Most taxpayers use the ATO's myTax portal to file.

To file your crypto taxes, you will need to:

• Log in to your Koinly account and make sure your settings indicate 'Australia' and 'AUD'.
• Ensure that all of your transaction history from all of your crypto platforms is imported into Koinly.
• Go to the Koinly reports page and download your ATO myTax report. You will need the figures from this report to file with myTax.
• Log in (or create) your ATO myTax account from the my gov website.
• Select manage tax returns.
• Select the option for the 2023/2024 return.
• Make sure your personal information and contact details are correct, then press next.
• Check your financial institution details are up to date, then press next.
• Under the personalise your 2023-24 return section, fill out your personal details as they apply to you.
• For your crypto investments specifically, you may need to select three options in this section depending on your investments. For crypto capital gains or losses, check the box next to you had Australian interest, or other Australian income or losses from investments or property, then from the new drop-down menu, check the box next to capital gains or losses that are not from a managed fund. For crypto income, check the box next to you had other income not listed above. For deductions, check the box next to you had deductions you want to claim, then from the new drop-down menu, check the box next to other deductions.
• Complete the rest of this section as it relates to you and then select next.
• On the prepare your 2023-24 return page (step 4) page, select add/edit next to capital gains or losses.
• In the box under total current-year capital gains, copy and paste the figure next to total current-year capital gains in your Koinly ATO myTax report (in the capital gains summary section).
• In the box under net capital gain, copy and paste the figure next to net capital gains after CGT discount in your Koinly ATO myTax report (in the capital gains summary section). Alternatively, if you only have a capital loss for the year, enter this figure into the box under net capital loss carried forward to later income years.

Tax implications of bitcoin mining

Bitcoin mining is a complex process, and reporting mined bitcoin for tax purposes can be challenging. Here are the key tax implications of bitcoin mining:

Taxation as Income

The IRS, and other tax authorities globally, treats mined bitcoin as income. When you successfully mine bitcoin, you trigger a taxable event, and the fair market value of the cryptocurrency is added to your other taxable income for the year. This income tax is based on your ordinary income tax rate, which can range from 10% to 37% depending on your tax bracket.

Capital Gains Tax

When you dispose of mined bitcoin, by selling it or trading it for another cryptocurrency, you incur a capital gain or loss. This is calculated by subtracting the asset's cost basis (the value when it was mined) from the sale price. If the value of the bitcoin has increased, you will pay capital gains tax on the profit. If the value has decreased, you can use the capital loss to offset your gains through tax-loss harvesting.

Business vs Hobby Mining

The tax treatment of bitcoin mining income can differ depending on whether it is classified as a business or a hobby. If bitcoin mining is your primary source of income and you have significant mining equipment, it is likely considered a business. In this case, you will need to pay self-employment tax and can deduct business expenses such as equipment, electricity, repairs, and rented space. If mining is just a hobby, you will report the income as "other income" on your tax return and cannot deduct most expenses.

Record-Keeping and Reporting

It is essential to maintain detailed records of your bitcoin mining activities, including the dates and fair market values of your earnings. While mining companies typically do not issue Form 1099 for income received, you are still responsible for reporting your bitcoin mining income to the tax authorities. You may need to report your mining income on different tax forms depending on whether it is classified as business or hobby income.

Tax Compliance

Not reporting your bitcoin mining income or evading taxes on your mined bitcoin can lead to serious consequences, including fines, penalties, and even jail time. The IRS and other tax authorities are increasingly focusing on the cryptocurrency industry, and they have methods to track blockchain transactions and identify taxpayers who fail to comply with tax regulations. Therefore, it is crucial to understand and comply with the tax laws applicable to bitcoin mining in your jurisdiction.

Bitcoin as payment for goods or services

Bitcoin is considered property by the IRS and is taxed as such. If you use Bitcoin to purchase goods or services, you will need to pay taxes on the increased value between the price you paid for the crypto and its value at the time you spent it. This is because you trigger capital gains or losses if its market value has changed.

For example, if you use Bitcoin to buy a car, you will need to determine the fair market value of the Bitcoin on the day you make your car purchase. You can consider it like you sold your Bitcoin, but instead of getting money for it, you received another item of value. The difference between the cost basis of your Bitcoin, which is generally the amount you paid for it when you acquired it, and its fair market value on the day you bought the car will result in a gain or loss that you will report when you file your taxes.

The IRS has provided specific guidance on transactions involving digital assets that should be included in a tax return. One of the transactions is the exchange of a digital asset for property, goods, or services. This means that if you use Bitcoin to pay for goods or services, you will need to report this transaction on your tax return and pay taxes on any gains.

It is important to note that the tax basis of Bitcoin can become more complicated as less straightforward transactions occur. For example, if you receive Bitcoin as a gift or donate it to charity, once you dispose of your Bitcoin, you will need to pay taxes accordingly. This means that you will need to know the cost basis of your gifted Bitcoin, which depends on whether you have a gain or loss when you sell or dispose of it.

Overall, if you use Bitcoin to purchase goods or services, you will need to report this on your tax return and pay taxes on any gains or losses. The amount of tax you pay will depend on factors such as your income, tax status, and the length of time you held the Bitcoin before using it to make a purchase.

Frequently asked questions