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Bitcoin Tax Calculator

Does Capital Gains Tax Apply to Bitcoin?

Are you wondering whether capital gains tax applies to Bitcoin? If yes, here’s what you should know about Bitcoin and capital gains tax. 

Anybody that has used or owned Bitcoin might owe taxes regardless of how they used or acquired the cryptocurrency. Recently, the U.S president proposed an increase in capital gains tax. And this prompted crypto investors to wonder about the effects of this increase on them. This proposal aims to raise the long-term capital gain tax from 20% to 39.6% for investors earning a minimum of $1 million annual income from their investments.

But does capital gains tax apply to Bitcoin? If yes, what does this mean to a Bitcoin trader or investor? This article will answer such questions.

What Is Capital Gains Tax?

Online platforms like crypto genius define capital gains tax as the tax arising from an investment’s value growth. But a person or a corporation owes this tax upon selling the investment. Thus, capital gains occur when a person or corporation sells the asset.

Therefore, this tax doesn’t apply to an unsold investment or unrealized capital gains. No matter how long a corporation or individual holds an investment, annual stock shares appreciation is not subject to this tax until their sale.

Understanding Capital Gains Tax on Bitcoin

People buy, sell, mine, and use Bitcoin to pay for items and services. Since the taxman considers Bitcoin a property rather than a currency, it is taxable. Also, when clients and employers pay in Bitcoin, the recipient gets taxable income. Thus, the recipient can report their transactions in fiat currency, meaning they have to convert the Bitcoin value to conventional money when selling, mining, buying, or using the cryptocurrency.

Ideally, the government taxes Bitcoin as a property, like stocks. Therefore, Bitcoin users have to pay capital gains tax when trading, selling or using Bitcoin to pay for items and services. Determining taxes on Bitcoin gains entails calculating the capital gains and identifying the tax rate.

The tax rate varies depending on how a person holds the Bitcoins and the income. Nevertheless, the tax rate can be equivalent to the revenue or long-term tax rate, depending on the duration of a person holding the asset.

How Increasing Capital Gains Tax Affect Bitcoin Traders

The proposed capital gains tax increase would apply to investors with more than $1million in income. That means it wouldn’t affect many households. Ideally, many Bitcoin investors and traders may not notice a change in their long-term tax rates. Nevertheless, investors making over $1million in income will almost have a double tax rate.

Consequently, many crypto whales might decide to sell their holdings. Some whales sit on large unrealized gains amounts, hoping to lock in low tax rates on Bitcoin gains. Although uncertainty surrounds the proposal, it’s not clear whether the government has strategies for offsetting capital gains, thereby reducing taxes on Bitcoin gains if the rates increase.

How to File Bitcoin Taxes

Filing your Bitcoin tax rates requires a trader or investor to be organized. Currently, the Form 1040 tax return asks you whether you transacted with any virtual currency throughout the year. Here’s what you need to file your Bitcoin taxes.

  • A record of Bitcoin transactions, including the amount you received in cryptocurrency, the duration you held the tokens, and the amount you sold it for, plus the receipts for the transactions.
  • You also need correctly filled tax forms, including Form 8949, Schedule D, Schedule C, and Schedule 1.

Once you have these requirements, you can use online tax software to file federal and state tax returns. Alternatively, you can hire an expert to prepare and file the taxes for you. And this can be particularly helpful if you find the laws around the Bitcoin complex. A certified public accountant specializing in crypto tax work can help you.