Bitcoin and cryptocurrency in general have exploded in popularity over the past few years. Millions of Americans have bought, sold and used cryptocurrency for a variety of purposes.
Those who are new to the crypto world might wonder whether there are any tax implications to buying, selling and using Bitcoin and other cryptocurrencies. The answer to that question is yes. Here are some examples of when you may have to pay taxes related to your cryptocurrency activity:
Using Bitcoin as Compensation
Do you own a business that accepts Bitcoin as a method of payment? Are you an independent contractor who has received Bitcoin as payment? Are you an employee of a business that pays at least partially in Bitcoin? If you said yes to any of these, that Bitcoin you received is considered taxable income by the IRS.
The IRS considers cryptocurrency property. You don’t have to pay a tax when you buy crypto, but you may have to when you sell. If you sell or trade your crypto for a gain, you will have to pay a tax. Let’s say you bought $2,000 worth of crypto and later sold it for $2,200. You’d have to pay taxes on the $200 you made. Conversely, if you lose money on a transaction, you can deduct that from your taxes.
As we covered above, if you buy a certain amount of crypto at a certain price and then sell it for a gain, that is taxable income. Now let’s say you bought $10,000 worth of Bitcoin and you trade it for a boat that would normally cost $20,000. You would now have to pay taxes on that extra $10,000. But if you used that same $10,000 Bitcoin to buy $17,000 worth of another cryptocurrency, you’d have to report $7,000 in gains.
If you’re a crypto enthusiast but need assistance filing your crypto-related taxes, Traders Accounting can help. Our tax professionals can assist you in filing all Bitcoin and cryptocurrency-related taxes. Call 800-938-9513 today for a free consultation.