Bitcoin Tax

Bitcoins, in simple terms, are a type of virtual currency that is part of a decentralized system that is not issued or controlled by any centralized authority, this technology is called the blockchain technology. This system also is used to record, verify, and store bitcoins and bitcoin transactions. It gained a lot of popularity since its inception in 2009, and it came with its own variety of benefits which it made popular among people. Every transaction is recorded on the public ledger, which is the blockchain.

Bitcoin Tax

As of today, any transaction which involves buying and selling of bitcoins, you will be taxed. This is due to the Internal Revenue System (IRS) stating that bitcoins should be treated as property and not currency.

The IRS also states in Notice 2014-21 “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency”. Transactions in digital currency must be subjected to the calculation of gross income and add the value of the digital currency in U.S. dollars on the date of the transaction.

If the bitcoin is held for less than a year before the transaction then short term gains are applied on it and if the bitcoin is held for more than a year then long term gains are applied. Every time a bitcoin holder is part of a transaction involving bitcoins, he/she is required to calculate the gains and losses on it.

Taxable Events

A taxable event is a specific situation during which you report your liabilities on your bitcoin transaction.

  • Exchanging cryptocurrency for another form of cryptocurrency
  • Exchanging Bitcoins for fiat currencies
  • Mining bitcoins is a taxable event
  • Paying for services and goods using bitcoins

Non-Taxable Events

Not every event is a taxable one, here are a few non-taxable scenarios

  • Donating cryptocurrency to a Non-Profit Organization
  • Buying cryptocurrency with fiat currency
  • Gifting of cryptocurrency to a third party
  • Transferring of cryptocurrencies between wallets

Tax evasions

In July 2019, the federal agency sent warning letters to more than 10,000 taxpayers who are suspected to be in possession of digital currency, the letter said, that if the digital currency holders failed to report income and pay the tax, during those instances they will be heavily penalized and they may even face criminal prosecution. Bitcoin holders have to report every transaction without fail.

Bitcoin is a matter of priority for the IRS, as bitcoin tax evasion is one of their main concern after the IRS declared that cryptocurrencies should be treated as properties and not currency.

People, in general, did not care much about disclosing their crypto gains and would ignore the prevailing law to reduce the risk of an audit and because of this, there was a surge in bitcoin tax evasion.

Because the law and rules were still very blurry in the minds of people, a lot of them pleaded to ignorance. Form 1040, requires you to pay crypto taxes if you have given, sold, purchased, exchanged or if you have acquired a financial interest in the form of digital currency. This is an effort by the IRS to stop bitcoin tax evasion. Failing to comply with the law and failing to pay your taxes on crypto gains is a punishable offense and you can be heavily penalized or face criminal prosecution. These were the efforts of the IRS to curb bitcoin tax evasion.

Best Crypto Tax Softwares

With the new law in place, it adds more work, like calculating your crypto taxes and calculating gains and loss on every bitcoin transaction. It becomes a very exhausting task to accomplish.

That is why there are online tools called crypto tax software that helps you calculate taxes on your bitcoin transaction. This has helped in reducing bitcoin tax evasion by helping people stay on the right side of the law.

1. TaxBit

It is the only crypto tax software that was developed by Tax Attorneys, CPAs, and developers. It provides a full audit trail for all their calculation so that it can easily be verified by CPAs or Tax Attorneys in the case of an audit. It allows you to calculate your gains and losses accurately and efficiently. Paying taxes and correctly is important as failure to comply will be seen as bitcoin tax evasion and you can be faced with criminal prosecution

2. ClearTax

A very well known Bitcoin tax software. It helps you calculate your crypto taxes and to do that you will have to provide some information regarding how many crypto coins you have in your possession and also the time when you acquired the coins, the price you acquired for, the price you are selling it at and the duration it was held for. If you have not kept a record of this information, ClearTax software has the ability to accumulate the required crypto data after which it will calculate your crypto taxes and generate your tax reports.

3. ZenLedger

One of the most popular Bitcoin tax software, it is known for its user -friendly interface. ZenLedger can help you collect your data regarding bitcoin transactions from almost all crypto exchanges. After collecting the required data, it then calculates and files your reports such as capital gains and loss, profit and loss statements, etc.

To avoid bitcoin tax evasions and to stay on the side of the law it is a wise thing to use crypto tax software as you don’t pay a penny more or less, you just pay the taxes you owe.