Tax Implications When Making Purchases Using Bitcoin
With Tax Day extended until May 17, you have some extra time to sort out all your tax documents. This is especially helpful if you’ve made any purchases using bitcoin, which could impact your taxes and what you owe.
Tax season is already complicated enough — and cryptocurrency can make it even more stressful. To better understand the tax implications when making purchases using bitcoin, Hafen Buckner has put together a guide of everything you need to know about reporting profits from Bitcoin on your tax return.
When to Pay Taxes on Bitcoin?
The Internal Revenue Service views bitcoin as property, which makes it subject to standard tax principles. If you used Bitcoin to purchase any goods or services throughout the tax year, you are required to include the market value of the cryptocurrency in U.S. dollars. However, you only owe taxes on those gains are realized — meaning that until you go to sell or make a purchase with your Bitcoin, you won’t owe taxes.
Additionally, you need to consider both capital gains and capital losses on your Bitcoin. If you experienced a gain, that income is seen as taxable. Similarly, if you sold your Bitcoin at a loss, you can write off the amount of money you lost on your tax return.
Whether you’ve gained or lost income with your crypto transactions, it’s important to remember that every Bitcoin transaction is taxable. Whether you’ve sold Bitcoin or made a purchase with it, you are required to report it on your tax return.
How Much Do I Owe?
There isn’t a one-size-fits-all answer for what you owe on your taxes this year. Ultimately, the amount you owe comes down to the length of time you held onto the Bitcoin and whether you sold the cryptocurrency for a profit or a loss.
How long have you had your cryptocurrency? If you’ve held your Bitcoin for more than a year, you will pay a long-term capital gains tax rate on any profits acquired from the sale. Your income determines this tax rate. However, if you’ve owned Bitcoin for less than one year, your taxes will be based on your normal income tax rate. If you accrue any losses related to your cryptocurrency, you can lower your taxable income by a maximum of $3,000, and those losses can be carried over to future years.
If you need help determining how much you will owe on your taxes related to a purchase made with Bitcoin, the team at Hafen Buckner can help.
Do I Need to Pay Taxes?
Yes, if you’ve earned taxable income from a bitcoin transaction, you will need to pay the Internal Revenue Service. Bitcoin shouldn’t be treated any differently than other sources of taxable income.
Any transactions made with Bitcoin are stored on a public network that the IRS has access to — no matter how big or small the transaction. This means that they are aware of any transactions that take place. If you skip paying taxes, you can expect to receive a notice from the IRS and will be charged interest on the owed taxes.
Tax Services in St. George, UT
If you’ve made purchases with cryptocurrency during the tax year, you might be at a loss of where to start when filing your tax return. If you’d like to feel confident in executing the right tax strategies to save you the most money on your taxes, Hafen Buckner’s team of Certified Public Accountants has the experience to help.