Understanding Bitcoin Taxes: What You Need To Know Before Investing

Paying Taxes on Bitcoin

The most common taxes you can expect to pay on your Bitcoin transactions are capital gains taxes, which apply when you sell an asset for more than you bought it. They also apply when you use your Bitcoin to purchase another good or service. After all, the IRS has made it clear that cryptocurrencies such as Bitcoin are classified as property, not as currency.

The type of capital gains taxes you pay will depend on how long you hold your Bitcoin before you sell. If you hold your Bitcoin for less than one year and then sell for a higher price, it’s a short-term capital gain you’ll be taxed at your normal income tax rate.

If you hold your Bitcoin for more than one year and then sell for a profit, you’ll be subject to long-term capital gains taxes. Capital gains taxes rates range from 0% to 20%, depending on your household income.

While most Bitcoin transactions are likely to be classified as capital gains, there are some exceptions. For example, any Bitcoin received as rewards or payment are classified as income. You’ll receive a 1099 form and must report those earnings to the IRS.

Keep in mind that even if you don’t receive a form for every Bitcoin transaction, you may still be subject to taxes. For this reason, it’s critical that you hire an accountant familiar with the tax treatment of Bitcoin and other cryptocurrencies.

Deducting Losses

There is some good news for Bitcoin investors. Just like your gains are taxable, your losses may be tax-deductible.

First, any losses you incur directly offset your capital gains. Suppose you have a Bitcoin transaction with a capital gain of $1,000. Normally you would pay capital gains tax on those earnings. But if you had another Bitcoin transaction with a loss of $1,000 — meaning you sold your Bitcoin for $1,000 less than you paid for it — then that loss would directly offset your gain. Your gains and losses would even out, and you’d have no taxable gains.

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