While Bitcoin has been around for some years as a new type of currency, many people still don’t understand all of the necessary fundamentals. One crucial thing about cryptocurrencies is that they can be taxable, which means that some of the operations, including Bitcoin, may need to be included in a tax report.
The reason cryptocurrencies are taxable is that the IRS issued a notice in 2014 in which they declared cryptocurrency as property and not currency. In essence, this is how it works:
Bitcoin is considered taxable when:
- You sell Bitcoin for fiat currency, such as USD, EUR, CAD, etc.
- You trade Bitcoin for other cryptocurrencies.
- You use Bitcoin to purchase a good or service.
- You receive Bitcoin as a payment from mining.
Bitcoin is not considered taxable when:
- You buy Bitcoin with fiat currency (Unless the purchase price is considerably lower than the market price of the Bitcoin)
- You donate Bitcoin to a tax-exempt organization.
- You’re sending Bitcoins to someone else as a gift.
- You transfer Bitcoins from your wallet to another wallet that is also your property.
How Do You File Bitcoin Taxes?
Filing your taxes can seem confusing at first, but it essentially comes to two main factors: Determining your cost basis and subtracting that cost basis from the Fair Market Value.
The cost basis refers to the amount of money that you put into the total Bitcoin purchasing process. This involves the purchase price as well as extra expenses such as transaction fees. To calculate your cost basis, follow this formula:
Purchase Value of Bitcoin + Extra Fees / Quantity of Holding = Cost Basis
After you’re done, you can proceed to step two of the process, which is needed to calculate your capital gain or loss, depending on the type of transaction you made. To calculate this, you have to subtract your cost basis from the Bitcoin’s sale value. The formula would look like this:
Fair Market Value – Your Cost Basis = Capital Gain or Loss
Now that you have this information, you have to file two important documents: IRS form 8949 and 1040 Schedule D. In form 8949, you have to list all your Bitcoin transactions with dates, cost basis, and gain/loss.
When you get to the total of all your trades, get that amount and transfer it to the 1040 Schedule D document. If you want more information regarding this, you can go through the Bitcoin trading App to better understand it.
What Happens If You Lost Money or Got Stolen?
If you got a capital loss with your Bitcoin transaction, you could file these losses in your tax report, which can save you money. On the other hand, if you got your Bitcoin stolen by a scam, you may file that as a theft loss. However, this doesn’t guarantee any returns.
What Happens If You Don’t File Bitcoin Taxes?
The IRS has recently been keeping a close eye on Bitcoin transactions and traders. For those who haven’t paid crypto taxes in years, the IRS has sent them warning letters. To keep it short: If you don’t…
Read more:Bitcoin Taxes in 2020: A Guide to Tax Rules for Crypto – Tech Guide