Cost Basis And Adjusted Basis Of Bitcoin
As with any other asset, the terms of cost basis and adjusted basis are important for proper tax treatment. The cost basis is the amount of money paid for Bitcoin by the taxpayer. Any additional costs, e.g. transaction fees and commissions, can be considered the adjusted price of the Bitcoin. Both the cost basis and the adjusted basis make up the acquisition cost. In the case of buying Bitcoin, the acquisition cost consists of the price of the Bitcoin at the time of purchase and possible fees, e.g. when buying Bitcoin on an exchange.
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This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions. If you need personalized help reviewing your transactions or preparing your US tax returns, check out our CoinTracking Full Service, provided by a team of crypto tax professionals led by Sharon Yip, the export CPA who helped us put together these insights.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.
Bitcoins & Taxation Frequently Asked Questions
Bitcoin is now listed on exchanges and has been paired with leading world currencies, such as the U.S. dollar and the euro. The U.S. Treasury acknowledged the growing importance of bitcoin when it announced that bitcoin-related transactions and investments cannot be deemed illegal.
Here are some answers to important questions about taxes associated with Bitcoin.
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How Do You Avoid Or Minimize Taxes On Bitcoin
The methods for minimizing your tax burden with cryptocurrency are similar to how stock traders minimize their taxes. Holding your positions long enough to qualify for long-term capital gains is the easiest way to reduce your tax burden. You may also find a retirement account that allows for cryptocurrency investments, and these tax-advantaged retirement accounts can reduce or eliminate your tax burden on gains.
She Receives The First Coins From Mining
In June 2021, Sophie received her first coins from mining. She needs to recognize the Fair Market Value of the coins she received from mining as income. At that time, she received 0.05 BTC when 1 BTC is worth $30,000. As a result, she needs to recognize $1,500 as income. Sophie will need to report this on her income tax return, including all the future income she will earn from mining in the following months.
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Do I Have To Pay Taxes If I Am A Bitcoin Miner
Yes. Cryptocurrency mining is considered a taxable event. The fair market value or cost basis of the coin is its price at the time at which you mined it. The good news is that you can make business deductions for equipment and resources used in mining. The nature of those deductions differs based on whether you mined the cryptocurrencies for personal or individual gain. If you run a mining business, then you can make the deductions to cut down your tax bill. But you cannot make these deductions if you mined the cryptocurrencies for personal benefit.
Calculating Taxes When You Buy And Sell Cryptocurrency
When you buy and sell cryptocurrency, comparing your net proceeds to your cost basis isn’t the only step in figuring how much you owe in crypto taxes. You also need to consider the length of time you held the asset, as this determines the type of capital gain or loss you recognize. Depending on how long you hold your cryptocurrency, your gains or losses will be considered “short-term” or “long-term.” That distinction will play a big role in how much you have to pay in crypto taxes.
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Purchasing Them From A Bitcoin Exchange Against Real Currency
Everyone cannot be a bitcoin miner. Hence, you can consider buying bitcoins from bitcoin exchanges and store them in an online bitcoin wallet in digital form. Unicorn, Bitxoxo, Zebpay, Coinbase etc., are some of the bitcoin exchanges presently in India. Such bitcoins would be purchased in consideration for real currency.
It would be interesting to note that currently, the value of 1 bitcoin is approximately about INR 31,99,620.
How Are Bitcoins Taxed In India
The concept of bitcoins being quite new to the Indian market, apparently the government has not yet brought taxability of bitcoins into the statute books. At the same time, the levy of tax on bitcoins cannot be ruled out because the Indian income tax laws have always sought to tax income received irrespective of the form in which it is received.
Therefore, the possibility of tax on bitcoins can be looked at under the following circumstances:
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Do You Pay Taxes When You Earn Crypto Income
Jake runs a cryptocurrency mining operation. Every day, Jake mines 0.5 bitcoin through his crypto mining rigs.
In this example, Jake would recognize income for the USD value of 0.5 bitcoin each day. For example, if Jake mined 0.5 bitcoin today on November 30, 2020, he would recognize $9,750 of income .
When Do You Have To Pay Taxes On Bitcoin
The IRS further indicates that Bitcoin is treated as property and is subject to general tax principles. You must include in the fair market value of the currency in U.S. dollars in your gross income if you’re paid in Bitcoins for goods or services. Transactions using virtual currency should be reported in U.S. dollars.
The fair market value of Bitcoins can be established by converting them into U.S. dollars at the current exchange rate at the time they’re received.
You’ll also have a capital gain or a capital loss if you dispose of Bitcoin, because it’s considered property for tax purposes. A gain represents income, and income is taxable even if you’re paid in virtual currency.
“Every Bitcoin transaction is taxable,” writes Tyson Cross, a tax attorney who specializes in virtual currencies. “Bitcoin users will have to calculate their gain or loss every time they purchase goods or services with Bitcoin.”
As with other types of property, you would acquire it first, often by exchanging cash for the asset. You then own the property for a period of time, and you might eventually sell it, give it away, trade it, or otherwise dispose of it. Capital gains taxes come due at this point.
Four things will happen when property is disposed of:
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What Taxes Do Companies Have To Pay On Their Bitcoin Transactions
Commercial companies cannot unlike private investors make private sales transactions. Transactions with Bitcoins, which are part of their business assets, lead instead generally to earnings from business according to Section 15 of the German Income Tax Act. A minimum holding period, after the expiration of which tax exemption arises, does not exist in this case. Depending on the legal form of the company, the profits generated in this way are then subject to income tax or corporate tax , public limited company , etc.). In addition to the income tax effects of Bitcoin transactions, however, above all their value-added tax treatment is of particular interest to companies.
How Is Bitcoin Mining Taxed Do You Pay Taxes On Bitcoin Mining
In the US, if you receive Bitcoin or any other crypto from mining operations, youll have a taxable event. According to the IRS crypto guidelines, if you receive Bitcoin or crypto when performing a service, you need to recognize it as income and pay income taxes.
As a result, if you plan to mine Bitcoin or another cryptocurrency as a hobby, youll have to recognize the Fair Market Value as hobby income when you receive the coins from mining.
If youre mining as a business, youll recognize the coins from mining at the time of your receipt. Of course, the amount of taxes you need to pay and the filing obligations for a business may differ from an individual doing Bitcoin mining. More on crypto mining tax reporting later in this article.
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Do You Pay Taxes For Holding Cryptocurrency
If you simply buy bitcoin or another cryptocurrency and hold it in a wallet, you do not have any sort of tax reporting requirement as you havenât realized a gain or loss on your investment yet.
Once you sell, trade, or trigger a taxable event by disposing of the coin, this is when you realize a capital gain or loss.
Do You Pay Tax When You Trade Cryptocurrency For Other Cryptocurrencies
John purchases 5 Litecoin for $250. After holding onto his Litecoin for a couple of months, John trades all 5 Litecoin for 0.5 ETH. At the time of the trade, 5 Litecoin is worth $400.
In this scenario, John incurs a taxable event by trading his Litecoin for Ethereum. Trading one crypto for another is treated as a disposal, and here John incurs a $150 capital gain from the trade which he would need to report on his taxes .
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How Are Hard Forks Taxed
If a certain cryptocurrency that you are holding goes through a hard fork which âoccurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger,â the new forked cryptocurrency you receive is taxed as income.
Your cost basis in the newly received cryptocurrency becomes the income you recognize.
Example:
Megan held 2.5 Bitcoin in July of 2017 and received 2.5 Bitcoin Cash as a result of the bitcoin cash hard fork.
Megan recognizes income at the fair market value of the bitcoin cash at the time it was received. If Bitcoin Cash was trading for $500/BCH that day, Megan would recognize income of $1,250 . Meganâs cost basis in this Bitcoin Cash becomes $1,250.
Bitcoin Digital Currency And The Goods And Services Tax/harmonized Sales Tax
In 2013, the Canada Revenue Agency voiced its opinion that, if they receive bitcoins or digital currencies in exchange for their goods and services, commercial sellers of goods and services must collect Goods and Services Tax/Harmonized Sales Tax :
In addition, while not offering firm guidance, the Canada Revenue Agency hinted at its view of whether a purchase of bitcoin using Canadian currency would be exempt from GST/HST under the Excise Tax Act. Generally, the Excise Tax Act exempts from GST/HST the supply of financial services, which includes the exchange, payment, issue, receipt or transfer of money. But, since the Canada Revenue Agency asserts that bitcoin does not meet the definition of money, the Agency would likely insist that the exemption does not apply to a bitcoin purchase.
Still, Canada Revenue Agency has yet to provide guidance on several vital questions on the GST/HST implications of bitcoin transactions. For instance, neither Parliament, the Canada Revenue Agency, nor a Canadian court has yet to answer the following:
- Is bitcoin mining a taxable supply for the purpose of subsection 165 or 123 of the Excise Tax Act?
- Are bitcoin traders required to collect and remit Goods and Services Tax/Harmonized Sales Tax?
- What method should we use to value bitcoins for the purpose of subsection 165 of the Excise Tax Act?
- Are fees relating to bitcoin transactions a part of the value of the consideration for a taxable supply under subsection 165 of the Excise Tax Act?
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How Do Cryptocurrencies Work
Cryptocurrency trading is decentralised. This means that they are not circulated or supported by a central authority, such as a government, but are managed via a network of computers. However, cryptocurrencies can be bought and sold via exchanges and stored in wallets.
Unlike traditional currencies, cryptocurrencies are a shared digital record of ownership stored in a blockchain. When a user wants to transfer their units of a cryptocurrency to another user, they send them to their digital wallet. The transaction is only considered complete once it is verified and added to the blockchain in the so-called mining process. This is also how new crypto tokens are usually created.
When Youll Owe Taxes On Cryptocurrency
Because the IRS considers virtual currencies property, their taxable value is based on capital gains or losses basically, how much value your holdings gained or lost in a given period.
When you trade cryptocurrencies or when you spend cryptocurrency to buy something, those transactions are subject to capital gains taxes, because youre spending a capital asset to get something or get another asset, says Shehan Chandrasekera, CPA, head of tax strategy at CoinTracker.io, a crypto tax software company.
The difference between the amount you spent when you bought or received the crypto and the amount you earn for its sale is the capital gain or capital loss what youll report on your tax return. Broadly speaking, if you bought $100 worth of Bitcoin and sold it for $500, youd see a capital gain of $400. If your Bitcoin lost value in that time, youd instead face a capital loss. If your losses exceed your gains, you can deduct up to $3,000 from your taxable income .
The amount of time you owned the crypto plays a part, too. If you held onto a unit of Bitcoin for more than a year, it would generally qualify as a long-term capital gain. But if you bought and sold it within a year, its a short-term gain. These differences can affect which tax rate is applied. The tax rate also varies based on your overall taxable income, and there are limits to how much you may deduct in capital losses if your crypto asset loses value.
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Crypto Price Prediction: $100000 Bitcoin Could Come Even Sooner Than You Think With Ethereum Leading The Way
At the same time, there are some potential complications that you should keep in mind. For starters, its important to remember that cryptocurrencies can be quite volatile, and if their value depreciates sharply, your net worth may be affected. So it may be a good idea to make sure you’re only receiving a part of your salary in crypto or to consider selling some part of it immediately upon receiving it. On the other hand, you might choose to hold onto the currency if you know about crypto trading and are expecting your crypto assets to appreciate.
Understand how the taxes work.
If you’re receiving your salary in crypto, you also need to be aware of the tax implications and file your returns accordingly. To put it simply, say youre a freelancer who wants to receive a payment worth $1,000 from a client in bitcoin. On the day of the payment, if the value of the bitcoin is $10,000, you will end up receiving 0.1 bitcoin.
When it comes to taxation, the IRS states that you will need to determine the difference between your adjusted basis and how much you sell it for you should report this number on your taxes when you sell the currency. Many people are unclear on how crypto taxes work and end up not declaring crypto income. However, the IRS is stricter compliance with cryptocurrency requirements. So if you havent been declaring your crypto income, its about time you started doing so. You can even file amended returns for the income youve received in the past.
Benefits Of Cleartax Bitcoin Tax Calculator
- You can calculate short-term and long-term capital gains on bitcoin transactions in seconds.
- The ClearTax Bitcoin Tax Calculator is easy to use and may be used from the comfort of your home or anywhere.
- You get a real-time picture of the taxes you owe to the government when buying and selling bitcoins.
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Understanding The Rules On Long
The price of Bitcoin has soared exponentially within the last year, allowing investors to quadruple their gains without lifting a finger. If you’re thinking about selling a fraction or all of your Bitcoin investment, make sure you understand how taxes for Bitcoin work.
Bitcoin is a decentralized digital currency that offers investors more autonomy than other investment options. But investing in it does not mean you are exempt from taxes. You may have to give the IRS a piece of the profits you earn. However, there’s a way to lower your tax bill if you meet the rules for long-term gains tax treatment.
Here’s a breakdown of what you need to know to reduce your tax bill on Bitcoin — maybe even to zero –when you file your return.
