Do you have to pay tax on Bitcoins? If you’re in the U.S., then that’s an outright yes or else you may be calling the IRS on your tail. That is to say, whether you have been mandated to pay tax or not depends on the country you reside in. Some countries do not bat an eyelid to Bitcoin trading, while others believe that you must be a part of the community development program.
U.S. Citizens are Mandated to Pay Tax by the IRS
Here’s what we’re getting at, U.S. citizens have been mandated by the Internal Revenue Service (IRS) to report gains made from cryptocurrency trading. Failure to do so could attract a penalty such as paying 0.5 percent per month from the following month the tax was skipped and an extra 5 percent of what is owed, plus interest.
If that’s a lot to wrap your head around, then the simple fact is, you need to pay your tax. According to the IRS, spending your Bitcoin or using it to buy a house, car, food, and what have you, makes you are liable to pay tax. In their opinion, you converted your Bitcoin to cash before it was used to purchase either of these. But, if you didn’t, that does not still exempt you from your civic responsibility.
Tax is Not Levied of Crypto Funds Held
On the other hand, if you only held these virtual assets without selling them or using them to make purchases, then you don’t need to pay tax. Do you see the difference? The other side of the deal is that if you incurred losses through the trade of one virtual asset, there can be tax deductions on other assets where gains were made.
While you’re adhering to the law, it is also advisable to keep track of all cryptocurrency transactions you’ve made by exporting them to your computer. This is to ensure that you don’t pay more tax than you should. Usually, a tax is levied on the profit you made from when you purchased the asset to when it was sold.
How the IRS and other Country Agencies Determine Who is to Pay Tax
Now if you’re wondering, how will the IRS be able to ascertain whether I’m liable to pay tax through cryptocurrency trading, then there’s really no way they can tell. So far, platforms like Coinbase and Gemini cryptocurrency exchange have been mandated to issue 1099-K forms to clients who have made over $20,000 and have made at least 200 transactions. Other than that, the final decision lies with you.
Ryan Losi, a certified public accountant who spoke to CNBC said:
[For] now it is difficult for the IRS to really find out on an individual basis whether you reported your virtual currency sales or exchanges.
Another instance of this was reported on January 15 that Danish cryptocurrency exchanges have been mandated by the Danish Tax Agency to release information about their traders. It can only boil down to the fact that they want to ascertain who is liable to pay tax. Other countries that are hammering on tax payment by cryptocurrency traders are South Africa, Brazil, Chile, and Isreal.
Asides these, more countries are trying to legalize the use and trade of Bitcoin in a bid to tag them investment or property. With that categorization, cryptocurrency dealers will have to pay tax. An instance is the case of Pakistan which may soon make Bitcoin a legal currency in order to reduce tax evasion and money laundering through the use of cryptocurrency.