February 13, 2019 AtoZ Markets - 2017 was the year that cryptocurrencies became popular and profitable. It was an amazing period for traders as each day brought new and extravagant price changes that brought the crypto market cap from less than $20 Billion to more than $800 billion by the end of the year 2017.
In the year 2018, the cryptocurrency market has seen some pullback and lost over 1/3rd of its market cap. There is still widespread uncertainty around the concept’s full implications. That’s especially apparent coming out of US tax season. Moreover, huge sums of money are flowing through crypto markets, but how much of it goes to the government is on a debate. Here are the US Bitcoin and other altcoins tax obligations for 2019 which investors should focus on.
Tax Definitions on Bitcoin & Other Cryptocurrencies
Currently, most of the cryptocurrency traders rely on a tax advisory service to determine their tax liability. In the US, the Internal Revenue Service (IRS) has only issued one statement on the tax principles that apply to cryptos. And, it was published in 2014. Yet, a lot has changed since then. Bitcoin and other altcoins should be treated as property rather than currency. Therefore, Bitcoin is subject to capital gains tax. In other words, there is no tax obligation until the investor sells the coins and redeem the reward.
In the US, investing in Bitcoin is just like investing in any other capital assets, because Bitcoin is a currency, and it is considered as a property. According to IRS guidelines, cryptocurrency acts as “a medium of exchange, a unit of account or a store of value.” Moreover, the IRS keeps on to saying that cryptocurrencies can be used as a medium of exchange to purchase goods. But, most importantly, it does not have legal tender status in the U.S.A.
So, what does that mean as far as your taxes are concerned? Here are some important things that you need to know:
2019 Bitcoin Tax Guide – Basic Terminology
The terminology that applies to Bitcoin and other altcoins transactions also applies to other transactions. If you’ve ever purchased or sold a home or property in the US and had to pay taxes to the government because of that, you’ve heard some of these terms.
The first is a capital asset. This is anything you own, that includes stocks, bonds, home, and Bitcoin. The basis is the amount you paid to purchase the asset, including any fees that you paid.
Capital gains and losses are the profit or loss which you can make on the property. These gains or losses are unrealized when they are still just on paper. When you actually sell the property, the capital gains or losses turn out to be realized, and then you have to pay the taxes to the government.
Short-term capital gains are realized gains on any investment that you held less than a year while long-term gains are realized gains on assets that you’ve held for more than a year. These are important terms that you should know before understanding US cryptocurrency trading tax.
For example, if you buy Bitcoin (Satoshi) for $10, you need to pay a $1 fee to the exchange during the purchasing process. Your basis is $11 now. In a year, the price of bitcoin is worth $100 and you hold on to it for a longer period, you have an unrealized capital gain of $89. After another year, the price surged and now it’s worth is $189, and you sell the Bitcoin. You now have a long-term realized capital gain, which is now taxable.
Key Information Regarding Cryptocurrency Tax
When it comes to filing taxes in the US, it is all about having the right information available when it’s time to file. For Bitcoin and other altcoins, the information you need is as follows:
- The basis of the cryptocurrency.
- The date of purchase.
- Sell date.
- And the price at which you sold the cryptocurrency.
Using this information, you can figure out how much tax you’ll need to pay on your cryptos.
When you sell your cryptocurrency, the IRS considers that selling the bitcoin for cash and then using the cash. So, you’ll need to pay taxes on the cryptocurrency you sold, even if you used it to purchase something.
Additionally, this is even true even if you’re shopping somewhere directly which accepts Bitcoin as a method of payment. Because cryptocurrency isn’t considered as a legal tender in the U.S. as all crypto transactions trigger taxable events.
How Much Bitcoin Tax Will You Pay?
All your taxes will depend on the circumstances and your personal tax bracket. Here’s how it works:
Taxes on Long-Term Capital Gains: Long-term capital gains are taxed at a lower rate than your actual income tax, but the rate depends on your tax bracket. In the year 2017, tax cuts and jobs act go into effect for 2018 taxes. The act changes the way capital gains taxes are evaluated slightly.
Previously, long-term capital gains taxes used to work based on your tax bracket. Now, you’ll need to pay either 0%, 15%, or 20% on long-term capital gains which depend on your maximum taxable income level. For example, single taxpayers making up to $38,600 will now pay no long-term capital gains taxes. Single taxpayers earning income between $38,600- $425,800 will pay 15%, and single taxpayers making over $425,800 will pay 20% tax to the US government.
So, if you Buy-hold-Sell transaction on Bitcoin or another altcoin, it’ll work like this. Let’s suppose, if you buy a cryptocurrency for $1,000 on 1 Jan 2016 and you sell it for $2,000 on 1 Jan 2018, your profit would be $1,000, and you would pay either $0, $150, or $200 in taxes.
Taxes on Short-Term Capital Gains: If you buy Bitcoin or altcoins and hold it for less than a year than you need to pay short-term capital gain tax. Short-term capital gains are considered as a regular income, so they’re taxed at your regular income tax rate. Hence, if you’re in the 24% tax bracket, you need to pay $24 on a $1,000 short-term capital gain.
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