BitCoin May Not Be Entirely Tax-Free And Here’s Why


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Since its launch in 2009, Bitcoin has caused quite the stir in the financial world. It has gained popularity and quite a large following owing to the benefits and freedoms that came with it. Top of the list of benefits that saw this and other crypto currencies become a people’s preferred mode of transacting is the fact that there is no third party interference where BitCoin is concerned. This meant that government and other financial bodies could not dictate the fate of Bitcoin. It also meant since the transactions were between the two transacting parties, governments could not keep track of the transactions and as such could not subject crypto currency transactions to charges.

Well, the bubble protecting crypto currency users from the tax man is beginning to burst; in the US. at least. While the taxation guidelines around crypto currencies are rather unclear, what is clear is the fact that in the United States Of America, the Internal revenue Service (IRS) is treating Bitcoin as taxable property. What this means is that any transaction you make using Bitcoin is similar to buying or selling a piece of property. The transaction either translates into a net gain or a net loss. All transactions must, therefore, be reported to the IRS as you do your tax returns.

If this is rather confusing, let us break down the specific scenarios under which a crypto currency transaction will attract taxes. When you engage in crypto currency trading you are likely to either suffer a gain or a loss. This form of transaction is treated as asset trading and is subjected to capital taxes. If the result of your trading was a capital loss, then you are bound to be subjected to lower tax rates as opposed to having a capital gain. In the event that you receive payment for goods or services in the form of bitcoins or any other crypto currencies, your payment is regarded as income and can be subjected to income tax regulations. The value of income tax to be paid is determined by the market value of the crypto currency at the time of payment. Another taxable event related to crypto currency transactions is the switching out of one crypto currency for another. To the IRS, this is equivalent to selling your property, an event that will either generate a capital gain or a capital loss.

Any form of expenditure involving any crypto currency is considered a taxable event. If this expenditure happens before a year elapses since the purchase of the coin, then this event is subject to taxes equivalent to the value of the coin. If this transaction happens after owning the coin for a year or more, then you are subject to long-term capital gains tax conditions. Other taxable crypto currency transactions include airdrops, a profitable conversion of crypto currencies to other currencies as well as the mining of crypto currencies. All these are treated as income whose value is determined by the fair market value of the currency on the day of the transaction.