Bitcoin and other cryptocurrencies are digital currencies but they are an asset so it’s supposed to be taxed. Similarly, if you give your employees a salary in terms of bitcoins then it is also taxable income. Most people are not aware of the fact that they have to pay taxes on their cryptocurrency holdings because it is a digital currency that is out of the reach of the government.
However, the government has ensured methods and techniques to make sure that you pay your taxes. Whether you are using bitqs.app or any other application for investing in crypto, you owe tax to the government. Here is a little more that you should know about tax regulations on cryptocurrency:
Cryptocurrency is declared as a property instead of a currency. In 2014, the IRS issued this notice which may sound like a trivial distinction but this became the basis of making crypto a taxable asset. If you buy bitcoin for mining, you have to pay its tax immediately.
Most people think that if they buy a cryptocurrency for mining, they are not liable for tax payment unless they sell it. However, this concept is wrong because you are instantly under the regulations of law to submit your tax.
Secondly, if you use bitcoin for exchanging or buying something, you owe tax if the realized value is greater than the purchased value. Realized value is the sale price of bitcoin and purchased value is the price at which you bought the bitcoin.
Maintaining a record of your cryptocurrency activities is very important because it will help you stay on the right track and have a record of your taxes. For instance, you need to keep a record of the price at which you bought the cryptocurrency and the price at which you sold it.
Thus, you can calculate your tax easily. It is extremely important to pay the tax on your gains timely because even if you forget to pay due to an honest mistake, the IRS will not pity you. The agency simply sues such users of crypto who do not follow the tax regulations and don’t make their payment in time.
Cryptocurrency thefts are common and can occur to anyone but, they put you in a difficult position in terms of tax payment. The previous law said that if your cryptocurrency is stolen then you would get a theft loss deduction on your tax. However, the new policy eradicated this favor so even if your cryptocurrency is stolen, you owe complete tax to the government.
The Point of Relief
The above discussion leaves the impression that cryptocurrency taxes puts users in a hard position but, there is certain relief as well. Just like stock or bond, you can deduct capital losses on crypto as well. The Crypto market is not stable yet and the viability of this market puts the user in a difficult position sometimes.
Thus, if you are going through a hard time and incurring a loss in your digital currency then you can declare it on your tax return. You may get a tax reduction from the respective authorities.
To wind-up our discussion, let’s take a look at the situation where you sold your bitcoins in 2020. How much tax will you have to pay? It depends on how long you held the bitcoins and whether you sold them for a profit or loss.
However, on the bigger picture, if you hold your bitcoins for a year then you are eligible for a long-term capital gain tax rate that is determined by your income. However, if you owed the crypto for less than a year then you owe the normal tax income rate.