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Do People Have to Pay Taxes on Bitcoin?

As a matter of fact, there are certain ways and means through which not just bitcoin, but many other types of digital or virtual currencies can and indeed are taxed, as such.
The key point, when it comes to trading in bitcoin, is that there has to be a clear and transparent means of keeping records. This record keeping system can be roughly akin to the kind used when trading in stocks in the share market.
In the USA, at least the IRS or Internal Revenue Service (the tax collecting body of the federal government) considers all digital currencies (and yes that does include Bitcoin as well), to be classified as “intangible property.”
Here any and all investors as well as day traders that deal and hold digital currencies as a form of capital asset should use the same capital gain or loss tax treatment on all bitcoin transactions as they would on any other kind of intangible property, that is, with the help of the (capital) realization method.

Example

Suppose Mr. John Smith purchases bitcoins with US dollars and later sells them again in the same currency (that is US dollars) and makes a profit on this sale. In this case, Mr. Smith will have to show his overall capital gain on this particular transaction, and if he were to suffer a loss, then again, the same should be shown under the same method.
The same applies to people who also freely trade Bitcoin currency though leveraged Bitcoin contracts at any number of Bitcoin exchanges that are available in USA, and even beyond. It is imperative that they report all (actual) and ‘realized’ capital gains (or losses, as the case may be) on each and every transaction, even if the person conducting the trade does not by himself, convert all the Bitcoin so traded, back into the original currency such as the U.S. dollar.
Think of it as something along the lines of a ‘foreign based brokerage’ currency account. It may well be completely denominated by a specific foreign currency, for example, the British pound. Here, the trader will conduct his transactions in different European stocks and equities that will be held in British Pounds only and he will not convert these same Pounds into U.S. dollars during the duration of the particular financial year, in which the transactions actually took place.
Currently, the bBtcoin trader has two options of reporting his tax dues. They include the following:

  • Convert Bitcoin to U.S. dollars on every sale and purchase transaction. In this case, he will have to use the Bitcoin market price on the specific day of the transaction in terms of US dollars.
  • Or alternately, he would be able to use Bitcoin itself, as a fully functional currency and would then, base his tax calculations on the ‘yearly’ conversion rate between Bitcoin and the US dollar.

However, in either case, he would still have to pay all of his tax dues in any event.

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