Developed economies across the world are gearing up to bring decentralized currency under the purview of laws and regulations. It has been declared by the IRS that Bitcoin is to be considered property and not a currency. Under U.S. tax law, bitcoin and other cryptocurrencies are classified as property and subject to capital gains taxes. But you only owe taxes when those gains are realized. Capital assets are taxed whenever they are sold at a profit. When you purchase goods or services with cryptocurrency, and the amount of crypto you spend has gained in value over what you paid for it, your spending incurs capital gains taxes. Here’s what you need to know about reporting crypto profits in 2020.
What is a Bitcoin Tax Calculator?
The Bitcoin tax calculator is an online tool for the estimation of long-term capital gains tax and short-term capital gains tax on the profits realized from Bitcoin trading. Most traders and investors prefer to hold on to their Bitcoin assets and this holding period has a significant impact on the taxation of Bitcoin. If the holding period is less than 3 years, then the investor acquires short-term capital gains. The profit is calculated along with taxable income, and the taxation is imposed according to the income tax slabs.
How Do Bitcoin Tax Calculators Work?
You can use a cryptocurrency tax calculator to handle your crypto taxes. The Bitcoin tax calculator displays the capital gains tax extracted from Bitcoin on the basis of the holding period. The Bitcoin tax calculator comprises a formula bar for the user to enter the Bitcoin transaction fees, the holding period, the buying and selling price of Bitcoin, and the nature of the transaction, for the computation of taxes.
When Do You Have to Pay Taxes on Bitcoin?
If bitcoins are held for less than a year before selling or exchanging, a short-term capital gains tax is applied, which is equal to the ordinary income tax rate for the individual. However, if the bitcoins were held for more than a year, long-term capital gains tax rates are applied. Individuals pay taxes at a rate lower than the ordinary income tax rate if they have held the bitcoins for more than a year. However, this also limits the tax deductions on long-term capital losses one can claim. Capital losses are limited to total capital gains made in the year plus up to $3,000 of ordinary income.
How is Bitcoin taxed?
How you receive and use bitcoin can impact the taxes you pay. For instance, mining bitcoin creates a taxable event. You’d need to calculate the fair market value of the bitcoin on the day it was mined and pay income taxes on it.
What Happens If You Don’t Pay Taxes?
The consequence of non-payment of Bitcoin taxes is the same as that of non-payment of traditional property taxes. It is not possible to evade Bitcoin taxes as the IRS keeps track of the transactions conducted by every Bitcoin user. At the very least, the IRS can track and confirm every Bitcoin transaction as all the Bitcoin transactions are permanently recorded in the public and decentralized Blockchain network. If one avoids paying Bitcoin taxes, then the IRS sends a notice to the person to impose compliance with the Bitcoin tax laws.
The notice from the IRS also imposes a penalty payment of 0.5% of the tax amount up to an interest rate of about 25% of the unpaid balance. An additional penalty fine has also been imposed upon the tax defaulter since the financial year 2020. If the Bitcoin taxes are not met despite repeated notices, then the IRS employs enforcement mechanisms like imposing levy tax on bank savings and income or collecting taxes from liens secured against the Bitcoin assets.
Tax Tools for Bitcoin
One of the most secure ways to pay Bitcoin taxes is by using a Bitcoin wallet that has implemented risk mitigation tools to make buying, trading, and selling Bitcoin more secure and user-friendly. If you’re just looking for a platform to get your taxes done with the help of professionals but with a considerably steeper price than the competitors, we recommend TokenTax.
Whether you owe taxes on your Bitcoin depends on how you got it and how you use it. If you earn cryptocurrency by mining it or receive it as a promotion or as payment for goods or services, it counts as regular taxable income. You owe tax on the entire value of the crypto on the day you received it, at your regular income tax rate. If you spend or sell your Bitcoins for more than their value when you first received them, you owe short- or long-term capital gains taxes on the profits, based on how long you’ve held it. All of this might seem like a lot to track. You shouldn’t take any shortcuts. Taxpayers are required to report their crypto transactions on their tax returns. However, You can make a good amount of profit from Bitcoin trading if you choose a trading platform like Bitcoin Loophole. It is an automated trading platform and Its algorithm is designed in a way that It focuses on making profit from Bitcoin trading. You can check Bitcoin Loophole Review on the official website or you can read it on google to know more about it.