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HOW DOES TAX POLICY SURVIVE THE IMPACT OF BITCOIN?

Bitcoin is the first form of cryptocurrency that functions on blockchain technology. It is a digitized yet secure currency that has made waves in the fintech industry. Bitcoin functions on a decentralized system and is not controlled by single institutions like banks. Bitcoin miners can exchange these bitcoins for fiat money like US Dollars, or use them to directly purchase goods and services.

Impact of Bitcoin on the Tax Policy

In 2019, the Internal Revenue Service (IRS) declared that it was in the process of contacting some 10,000 taxpayers who owe money to the US government on account of bitcoin transactions. According to the law of the land, those who do not report bitcoin earnings and transactions may face penalties or even criminal charges and prosecution.

Although originally the process of bitcoin transactions was opaque, most of today’s bitcoin transactions are entirely transparent. In the past, governments have observed a rise in black-market trading of bitcoin transactions. However, bitcoin transactions are now subjected to anti-money laundering requirements.

Although bankers, regulators, and judges are divided on how to categorize bitcoin trading, they are all in agreement that bitcoins must be taxed.

There is always speculation regarding taxes on cryptocurrencies like bitcoins because nothing regarding this has been put into the law. Cryptocurrencies were first addressed by the Internal Revenue Service in 2014. In that report, cryptocurrencies like bitcoins were classified as property. This meant that anything purchased with cryptocurrency was taxable as a capital gain. Depending on the time period for which the asset was held, it can be taxed as long-term or short-term.

Although cryptocurrency exchanges were not previously required to issue 1099 forms to clients, exchanges are now required to disclose details of transactions to the IRS. Cryptocurrency exchanges are now making it possible for clients to compile a list of all their transactions, which can then be downloaded and coupled with a cryptocurrency tax service to produce a fully populated IRS tax form. 

What is taxable and not taxable?

Taxable:

• Cashing out, that is, exchanging cryptocurrency for fiat money

• Personal purchases made with bitcoins

• exchange of one form of cryptocurrency for another.

• Receipt of mined cryptocurrencies like bitcoins.

Non-taxable:

• Purchase of cryptocurrency with fiat money

• Donation of cryptocurrency to a charity that is exempted from taxes.

• Gifting cryptocurrency to third parties.

• Transfer of cryptocurrency within personal wallets.

How much do you owe?

Determining exactly how much you owe to the government for cryptocurrencies can be a bit “taxing”.

• Cashing out: The amount of tax payable depends on the price at which the Bitcoin was sold. The gain in the transaction is the difference between the buying price and the selling price of the bitcoin and this gain is taxable. Depending on the time for which the cryptocurrency was held, capital gains tax can be long-term or short-term. The capital gains tax depends on the income tax brackets of individuals.

However, the scenario is different in the case of selling cryptocurrencies that the trader has mined themselves. The profit made by selling mined cryptocurrency is taxable as business income and the amount that went into the mining operation is deductible from such tax.

• Personal Purchases of Goods and Services: The price of the purchased commodity is to be subtracted from the base price of the bitcoin at which it was purchased originally. The gain amount is taxable. However, if the customer faces a loss in using bitcoins for personal purchases, he cannot declare it as a loss on their tax forms as tax deduction on losses is available only for trading in capital assets.

• Exchange of Cryptocurrency: While exchanging bitcoin for some other form of cryptocurrency like Ethereum, the investors need to report the difference in Bitcoin’s base price and its price when it was exchanged.

Conclusion

The use of Bitcoins in transactions has skyrocketed since its inception. This is the reason why bitcoins have become taxable and are subjected to institutional regulations. Cryptocurrency transactions have taken another step towards transparency by being subjected to taxes.

 

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