Understanding Bitcoin Taxes: What You Need To Know Before Investing

Bitcoin and other cryptocurrencies have become some of the most popular investing trends over the past few years. In fact, recent data shows that as many as 14% of Americans hold cryptocurrency in their portfolio.

Unfortunately, many people dive into Bitcoin investing without fully understanding the tax consequences. And in 2019, the Internal Revenue Service (IRS) announced it would be sending letters to more than 10,000 taxpayers who may have failed to report crypto transactions over the previous tax year.

Before you begin investing in Bitcoin — or any investment, for that matter — it’s important that you understand exactly what taxes you might be subject to.

Cryptocurrencies are Property

In 2014, the IRS issued a statement clarifying that for tax purposes, Bitcoin and other virtual currencies would be treated as property rather than currency. The IRS definition of virtual currency is “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”

So what does this mean for tax purposes?

Essentially it means that Bitcoin transactions will be taxed like other properties such as stocks, bonds, real estate, and more. Because of this classification, Bitcoin investors may find themselves subject to capital gains taxes.

Bitcoin Transactions

The IRS requires that you pay taxes on Bitcoin transactions, just as you would for transactions involving any other valuable asset. Taxable Bitcoin events include:

  • Receiving mined Bitcoin
  • Selling Bitcoin
  • Using Bitcoin to pay for goods and services
  • Using Bitcoin to buy another cryptocurrency
  • Being paid with Bitcoin
  • Receiving Bitcoin rewards

It’s critical that you maintain documentation of any Bitcoin transactions you have throughout the year so you can file them appropriately on your taxes. If you need to report Bitcoin transactions, it might be best to hire an accountant to prepare your taxes to ensure everything is accurate.

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