When Dealing with Bitcoin, Consider the Tax Implications
You may have heard the term bitcoin, but what exactly is it? Bitcoin is a digital asset used for secure and instant transfer of value anywhere in the world. It is not controlled or issued by any bank or government; rather, it is an open network which is managed by its users.
As bitcoin gains more momentum, the investment community has taken notice, and so has the IRS. The IRS answered some common questions about the tax treatment of Bitcoin transactions in its recent Notice 2014-21. Tax treatment depends on how Bitcoins are held and used.
The IRS has made it mandatory to report bitcoin transactions of all kinds, no matter how small in value. Thus, every US taxpayer is required to keep a record of all buying, selling of, investing in, or using bitcoins to pay for goods or services (which the IRS considers bartering). Because bitcoins are being treated as assets, if you use bitcoins for simple transactions such as buying groceries at a supermarket you will incur a capital gains tax(either long-term or short-term depending on how long you have been holding the bitcoins). When it comes to bitcoins the following are different transactions that will lead to taxes:
- Selling bitcoins, mined personally, to a third party.
- Selling bitcoins, bought from someone, to a third party.
- Using bitcoins, which one may have mined, to buy goods or services.
- Using bitcoins, bought from someone, to buy goods or services.
If bitcoins are held for a period of less than a year before selling or exchanging, a short-term capital gains tax is applied, which is equal to the ordinary income tax rate for the individual. However, if the bitcoins were held for more than a year, long-term capital gains tax rates are applied.
Long-Term vs. Short-Term Gains
Short-term capital gains are taxed as ordinary income tax rates, while long-term gains are taxed at a lower rate, based on an individual’s marginal income tax bracket.
If you are in the 10%-15% tax bracket, your long-term capital gains rate will be 0%. If you are in the 25%-35% tax bracket, your long-term capital gains rate will be 15%. If you are in the 39.6% tax bracket, your long-term capital gains rate will be 20%. It should also be noted that taxpayers whose adjusted gross income is in excess of $200,000 (i.e., single filers) or $250,000 (i.e., joint filers) may be subject to an additional 3.8% tax as a net investment income tax.
Call us (512) 710-1000 or schedule an appointment to know more. Our team of experts is right here to answer all your doubts and questions.