Do You Have to Pay Taxes on Bitcoin?

L aunched in 2009, Bitcoin prices are touching the sky now 12 years later. But before you decide to invest in cryptocurrency, it is important to know that depending on your circumstances, you can be liable to pay taxes on Bitcoin.

Bitcoin Is Classified as Property

What does that mean? Well, simply put, property is anything that you own. Since you own Bitcoin, it is property. As property, you are liable to pay property tax on Bitcoin depending on when you bought it, how much you earn a year, and other factors.

However, you only have to pay tax if you sell Bitcoin at a profit. If you buy it for $50 and sell it for $110, you have a gain of $60, and if you sell it at a gain, you have to pay tax.

It’s pretty simple, actually. If you buy a plot of land and it increases in value over 5 years, the hypothetical gain you had is not liquidated. The moment you sell the plot of land, the profit becomes cash, and is thus liquidated. You then owe tax on the cash value of the profit.

So How Much Do I Owe?

Again, it depends. How long did you hold the Bitcoin before selling it? Holding refers to the period between buying and selling a certain thing.

You need to pay long term capital gains tax if you hold it for more than a year.

The tax rate depends on how much you earn in a year. If you are a single (unmarried) filer and earn less than $40,000 a year, your tax rate will be 0%. If you earn more than $40,000 but less than $441,450 a year, your tax rate will be 15%. If you earn more than $441,450 a year, your tax rate will be 20%.

However, if you hold it for less than a year, your tax rate will be the same as your income tax rate.

What if I Sell at a Loss?

When it comes to taxes, you’ll actually be in luck if you sell your Bitcoin at a loss. First, you will not owe tax on your sale. You can simply write off the amount that you lost and use it to lower your taxable income.

You can lower it by a maximum of $3000 per year as a single filer, and wait until future years to write off the rest of the losses (if beyond $3000).

What if I Sell a Little Bit?

You still need to report it to the IRS, and pay tax if applicable. Whether it’s at a profit or a loss, your tax filing needs to involve every little bit of Bitcoin that you sell. The IRS suspects there are vast amounts of underreporting when it comes to cryptocurrency, and they are targeting it with full force. Don’t let yourself be one of the victims.

What if I Spend My Bitcoin Instead of Selling It?

Well, once again, that depends on when you bought the Bitcoin and when you are spending it. If you bought a block of gold ten years ago, its value would’ve been substantially less than it is okay. Therefore, you can trade that block of gold for a lot more now than you could before.

The same is the case with Bitcoin. If you bought it for $500 two years ago but the value is now $2500, and you use the coin with the value of $2500 to buy your family new iPhones, you are using a profit of $2000 and that profit is capital gain. All capital gain is liable to tax and thus you need to report it to the IRS.

Taxes on Bitcoin: A Summary

Simply put, as a resident of the United States of America, if you decide to buy cryptocurrency and go for Bitcoin, yes you will be liable to pay taxes. If, as a single tax filer, you earn more than $40,000 a year, and sell your cryptocurrency at a profit, you do have to pay taxes.

However, if you earn less than $40,000 a year or sell your cryptocurrency at a loss, you do not have to pay taxes. In fact, you can report the losses and reduce the tax you pay on your income.

So there you have it. What do you think of taxes on Bitcoin? It is important to do your research before buying cryptocurrency. Yes, the profits look shiny and grand from afar, but you must weigh the pros and cons before diving right into investing in Bitcoin.

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