Unless you just woke up from an extended coma, you already know about Bitcoin. Even if you don’t know much about it, you must have heard or read about it somewhere. Nowadays, hardly a day goes by without people mentioning Bitcoin or writing about it on various media platforms, including new media like social media. If you are looking for a simple and hassle-free trading platform, you can visit Bitsoft 360
Bitcoin is a popular digital currency and asset. Many businesses in the US are now accepting Bitcoin payments and projections show that the trend will continue. The number of people investing in Bitcoin has also increased and is likely to continue rising. While it was easy for the government to ignore Bitcoin initially, it became increasingly difficult to ignore it with its growing popularity.
Bitcoin challenges the conventional centralized financial system. Instead of using fiat currency in transactions, people can now use their digital currency, Bitcoin. Additionally, Bitcoin is decentralized, meaning that the central government or any other financial entity has no control over it. This loss of control over Bitcoin is one of the primary reasons the government has been introducing Bitcoin regulations and policies.
Bitcoin and IRS
Since 2014 when the IRS issued a notice that it would treat Bitcoin as property for Federal income tax purposes, Bitcoin users have been required to include their gains or losses in their tax files. With the IRS treating all cryptocurrencies as property, the general tax principles applicable to conventional property transactions apply to crypto transactions.
Taxation applies when your Bitcoin gains. And this could be through the rise of Bitcoin price, selling Bitcoin at a profit, or trading with other cryptocurrencies. To illustrate a gain, let’s say you bought 1 Bitcoin for $24,000 and sold it for $$27,000 four months later. In this case, you have gained $3,000 from the sale. And this is what the IRS will tax based on current taxable rates.
Therefore, the IRS considers all gains on Bitcoin taxable. Whether you sell, use, or exchange Bitcoin and realize a profit, the IRS only considers the income for taxation purposes. The IRS will apply the short-term capital gains tax rate for gains made within a year. Viewing the example above, since you sold your Bitcoin after four months, then the short-term capital gains tax rate would be applied in calculating the amount of tax to pay.
However, the long-term capital gains tax rate would apply if you sold the Bitcoin after a year. And this means that even if you bought and held Bitcoin for ten years before doing anything with it, chances are that you will still pay the long-term capital gains tax because of Bitcoin’s value rise over that time.
What About Losses?
Bitcoin is not a guaranteed profit generator. Like any other asset, it could create gains or losses. For example, if you had bought Bitcoin in November 2021 when the price was around $68,000, you would have lost over 70% of your original investment since the price of Bitcoin has dropped significantly. So, how does the IRS treat such a loss?
To begin with, the IRS expects you to report all losses just like you would report all gains. That you do when you fill out the relevant forms. However, the IRS does not expect you to pay any taxes from Bitcoin losses. You have not gained anything, so there is no justification for paying taxes when you have lost.
The IRS is keen on taxing cryptocurrency since it falls in the same category as property. While the IRS will deduct tax from your Bitcoin gains based on the applicable tax rate, it will not cut anything from your Bitcoin losses.