It’s no secret that cryptocurrency investors are sitting on high profits, given that this year Bitcoin and Ethereum gained 100% and 470%, respectively, according to a report on Barrons. As crypto owners continue to create wealth from bitcoin profits, they need to prepare for the new tax laws. Undoubtedly, Washington DC sees the crypto industry as a vast and growing new source of collecting tax revenue. In fact, in the infrastructure bill signed by President Joe Biden recently, congress added several tax-reporting standards for crypto businesses and brokerages.

Additionally, the government expects to raise approximately $28 billion in ten years through monitoring and taxing cryptocurrency transactions. It also aims to crack down on crypto owners who under-report their gains. So, if you’re looking to invest in Bitcoins, ensure you know all about cryptocurrency taxation to reduce the risk of hefty penalties for non-compliance. Read on to learn more about bitcoin taxation and how to avoid getting into trouble with the IRS.

Understand What The New Law Changed

Based on the new infrastructure expenditure package, digital wallets and decentralized platforms for trading and lending cryptos will have to report tax information to brokerages like Coinbase. These brokerages will then provide the IRS with tax forms highlighting detailed transaction records of clients, the same way bond and stockbrokers do. Typically, crypto brokers will have to provide clients’ names, addresses, and contact details. They’ll also have to state their customer’s gross proceeds from crypto sales, including capital gains and losses. Even more interesting, individuals who receive over $10,000 will be required to disclose the sender’s identity. This regulation is similar to the anti-money laundering law for cash transactions exceeding this amount.

Bitcoin And Other Cryptos Are Considered Property

Cryptocurrency tax laws can be complex, but complying with IRS regulations isn’t all that difficult. As a crypto investor, you need to learn how cryptocurrencies are taxed so that you can comply with IRS rules. As a rule of thumb, bitcoin isn’t treated as a currency but as property. This means that bitcoin is susceptible to capital-gains tax on net profits generated from a sale. Ideally, if you sold bitcoin by trading it on the exchange market or cashed out to purchase goods or services, you’ll likely owe taxes. Note that you’re subject to taxation if the value you sold bitcoin at is greater than the initial price you acquired the bitcoin (realized value).

Depending on the realized value, you may be liable to a capital gain that’s taxable at short-term or long-term rates. Short-term capital gains tax applies to bitcoins sold within one year of acquiring them, and they are taxed like ordinary income, with rates ranging from 10% to 37%. On the other hand, long-term capital gain tax rates range between 0% to 15% and 20%. For taxpayers with more than $200,000 in investment gains, a surcharge of 3.8% is added to their long-term capital gain tax. Another aspect regarding crypto taxes you need to be aware of is tax liability linked to bitcoin mining. When you acquire bitcoins through mining, the value becomes taxable immediately, meaning you don’t have to sell your digital currency to owe taxes.

Record-Keeping Is Critical

Tracking your cryptocurrency transactions is key to ensuring you stay on the right side of taxation rules. With this in mind, keep records of the fair market value of your bitcoins when you bought or mined them. Likewise, you need records of the market value of the virtual currency when you traded it on the exchange or used it to buy goods or pay for services. When you have accurate details of your cryptocurrency activities, calculating your bitcoin taxes becomes quite easy. However, your crypto transaction records might not be readily available. In a typical investment market, your stockbroker sends a 1099-B form that shows your transaction costs.

But when trading with bitcoin, it’s likely that you won’t receive a Form 1099-B, one of the key reasons many crypto investors are unaware of their bitcoin tax obligations. As a result, they end up getting into trouble with the IRS. While a form 1099-K may be issued if you make payments worth $20,000 and record 200 transactions annually, you must meet both transactions. In most cases, crypto investors don’t transact 200 bitcoins. Nonetheless, you’ll still be liable to taxation, whether you meet the threshold or not. It’s worth noting that the Internal Revenue Service won’t take pity on you if you fail to pay bitcoin taxes, even if it was an honest mistake. Therefore, make it a habit to record your transactions and organize your paperwork.

Bitcoin Theft Has Negative Tax Implications

Losing bitcoins due to theft is frustrating. And while you have been able to deduct stolen bitcoin from your taxes before, you can’t under the new tax laws. That’s because the new taxation rules don’t allow taxpayers to deduct property losses. Another IRS rule that doesn’t seem favorable for digital currency owners is the like-kind exchange. This activity entails trading multiple types of property for the same kind of property without incurring taxes immediately, something the Internal Revenue Service has allowed investors to engage in for decades.

Before implementing the new crypto tax rules, bitcoin owners inquired whether they could participate in a like-kind exchange with other virtual currencies. The response was unclear because of whether one digital currency was like-kind to another crypto. Currently, the new tax reforms limit like-kind trading to real property only. This means you can’t trade personal goods under like-kind exchange.

There’s Tax Relief For Bitcoins

Bitcoin taxes can be stressful, but fortunately, you can deduct capital losses on cryptocurrency like you would when trading stocks and bonds. Bitcoin losses can help offset other capital gains from your sales. Remember, once you have calculated your gains and losses, you can only write off crypto losses of up to $3,000. Given that bitcoin prices keep fluctuating, you’ll likely incur losses. All you need to do is declare your losses on tax returns to increase the chances of reducing your bitcoin tax rates. Failure to file your bitcoin taxes can result in fines and penalties. The IRS might also choose to conduct an audit. So, whether you have had capital gains or losses, make it a habit to report your crypto transactions.

Crypto Gifts Are Taxable

If you give bitcoin to a friend or a younger relative, the IRS will treat the gift like any other. This means your crypto gift will be taxed, more specifically if it’s worth more than $15,000. When the time comes for the recipient to sell the crypto gift, the price basis remains the same as the givers. However, there are several ways you can avoid the gift tax. For instance, instead of gifting funds, you can use bitcoins to pay directly for educational or medical expenses.

Cryptocurrency taxes can be tricky, so you’re likely to get into trouble with the Internal Revenue Service in various ways. For this reason, it’s important to understand that you may owe taxes if you own or carry out transactions using bitcoin, and that’s because the IRS considers cryptocurrencies as property. Another way to ensure you comply with crypto tax laws is to keep bitcoin transaction records and declare losses when filing tax returns.