Finances

Do you Have to Pay Taxes on Cryptocurrency Profits?

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Written by Quentin Hack

For many years, the market of cryptocurrencies was surrounded by misconceptions related to the popular thought about how people could hide their activities by using transactions over e-wallet. However, many countries already introduced various regulations where each owner of Bitcoin and any other cryptocurrency must pay taxes. The main issue is that many people don’t even know about this feature. With the rise in popularity of Bitcoin in recent months, which is influenced by a huge increase in the value of this unit, which managed to break new records by hitting a price of over $57,000 in February, a lot of people again started to invest and trade with this virtual asset.

However, if you are living in a country that has official regulations related to this trading option, you must check them to avoid legal issues.  Therefore, you can avoid problems while you are trading. Also, you are interested to learn more about trading with Bitcoin, you can read more here. Furthermore, we are going to introduce you to some of the main features related to regulations where you have to pay taxes for owning and trading with cryptocurrencies.

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Cryptocurrencies are Form of Property

When it comes to the United States, they introduced a law in 2014, where cryptocurrencies are considered to be a property when it comes to tax regulations. Therefore, the first thing that you should know is that they don’t represent a currency, which is very important in terms of taxation. Also, different factors can affect the method of paying taxes. For example, if you got your Bitcoin or any other cryptocurrency through the mining process, you will need to pay taxes right after you acquire ownership. Moreover, when you decide to sell it through some online exchange platform, you will have to report that to IRS. In that matter, the expenses will be related to the current value of that unit on the market. Also, the difference between buying and selling price can affect the taxes as well.

It is Important to Keep Your Records

The great advantage of using an e-wallet for transactions is that you can easily check your history of trading and transactions. Also, that is especially beneficial for people who are not so familiar with regulations and the law. Therefore, you can avoid issues with the IRS with the saved records where you can calculate how much money you owe through taxes. On the other hand, it is essential to keep records of current prices as well since each taxation process will be related to the current value of Bitcoin on the market.

For example, the transaction with the same amount of BTC during the last period last years will require much lower tax expenses than during 2021 with record-breaking values. However, it might be complicated to find all those data, which is the main reason to file a report each time when you are trading with cryptocurrencies, especially if you are doing it more often. Day trading is a very popular method and avoiding saving records could create many problems.

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What If You Buy Something With BTC?

The common misconception among people is that they think that the IRS will treat that form of transactions with BTC in the same way as with standard currencies. Therefore, if you both some items by using an e-wallet, they will still consider it as a form of trade with assets other than money. Moreover, you have to consider the volatility as well. For example, if you bought 1 BTC last year for the price of $5,000, and you know both a new vehicle with the same unit, but its value is now over $50,000, you will have to report the capital gain on that trade.

Learn More About Proper Forms

Since there are various methods of trading and using cryptocurrencies, you should know that you will have to report different tax forms. For instance, Form 8949 is related to buying or selling this unit in form of investment. The taxes are calculated according to the values of that unit on the days of buying and selling. Moreover, there is a Schedule C form, where you need to calculate all your gains, along with cryptocurrencies. In case that you were mining, you will need a C form. Also, you can choose if mining is a hobby or your business. When you select the proper form, you can use special software that will calculate your taxes and report them to the IRS.

How to Reduce Taxes and Is There Any Way to Avoid Them?

The simplest method for reducing the taxes is to hold them in the long-term period. However, there is always a risk that they could lose in value. Also, when you decide to sell them, you will still be obligated to pay taxes, and higher value will affect higher taxes as well since this activity will also be considered as profit gain. On the other hand, if you were mining Bitcoin, you can report the expenses as a way to get some percentage deducted. Also, an excellent method is to invest in BTC through an insurance policy or retirement plan. This method is perfect for avoiding paying for capital gains. Furthermore, there is also an option to invest in BTC as a resident of Puerto Rico. The unique rule for US citizens is that they can avoid reporting capital gains only as residents of this island, which belongs to the United States.

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Last Words

While many people find this as an issue since their profit will be much higher without the need to pay any taxes, the advantage is related to the implementation of cryptocurrencies in standard financial systems. By improving the regulations and accepting this digital asset, there is an even higher chance for further increase in price over years. Also, we have to mention that investing in many other countries is more profitable at the moment, but we expect that many of them will soon start implementing similar laws and regulations that will introduce taxes for owning and trading with BTC.

About the author

Quentin Hack