Even though Bitcoin is an unregulated asset, the IRS still takes a slice of your trades. Because bitcoin and other digital currencies are taxable, you must disclose all bitcoin transactions on your tax return. You may argue that this is yet another perplexing task, just as arduous as trading the coin itself, this is true.
In this article, we will be looking at a few guidelines on how your digital asset is taxed.
Bitcoin is a Tangible Asset
It is important to understand that Bitcoin is considered as an asset by the government and regardless of how you see or use it, the IRS maintains that bitcoin and other cryptocurrencies are not money for tax purposes, rather they are marketable securities, which means they’re taxed just like stocks. Hence, long-term bitcoin owners would benefit from this because the currency is taxed at ordinary income rates, which are less advantageous than capital gains tax rates.
Method of Acquisition Matters in Bitcoin Taxation
The taxes you pay may be influenced by how you receive and utilize bitcoin. Mining bitcoin, for example, is a taxable gain, requiring you to compute the bitcoin’s fair market value on the day it was mined and pay income taxes on it.
You can calculate the fair market value of a cryptocurrency by translating it into an actual currency, which can then be turned into US dollars using the bank’s established exchange rate. The fair market value of a cryptocurrency is the price at which it is recorded on a distributed ledger on the date and time the trade was made.
Making an IRS Tax Return
Keeping precise records of your bitcoin transactions is crucial when it comes to taxation because possessing digital money isn’t as simple as owning stocks. And if the institution where you store does not help with tax reporting, the onus is on you to keep a record of all your digital currency receipts, sales, exchanges, and dispositions.
Finally, ensure you do not conveniently or forget to send in the report. The IRS is well aware of these hazards, and it is constantly watching and scrutinizing these capital inflows.