Do you owe taxes on your bitcoin? The answer depends on when you bought and sold

After a relatively quiet few years following a short-lived surge in 2017, bitcoin rose again in late 2020, finishing the year with a single coin worth just shy of $30,000.

The blistering rally prompted many investors to invest in the cryptocurrency for the first time, while others who had been holding onto their bitcoin for some time took advantage of the token's exploding price to sell some of their holdings for a profit.

But with Tax Day looming, some users will come face-to-face with the fact that they now owe taxes on those gains. Depending on when you bought and sold your bitcoin — as well as other factors, such as your income — you could be on the hook to pay.

Here's what you need to know about reporting crypto profits on your 2020 tax return.

The IRS classifies virtual currencies as property. What does that mean?

Under U.S. tax law, bitcoin and other cryptocurrencies are classified as property and subject to capital gains taxes. But you only owe taxes when those gains are realized.

Just because your Coinbase portfolio drastically grew in value last year doesn't mean that you'll be writing out a check to Uncle Sam come April. Similar to trading stocks, you only need to list gains you earn from bitcoin as income when you decide to sell.

"If you never sell your bitcoin, you never owe cash," Ben Weiss, COO of CoinFlip, the largest Bitcoin ATM provider in the country, tells CNBC Make It. "Bitcoin is treated like if you bought and sold a stock."

I sold my bitcoin in 2020. How much do I owe?

It depends on how long you held the bitcoin and whether you sold it for a profit or a loss. If you owned your bitcoin for more than a year, you will pay a long-term capital gains tax rate on your profit, which is determined by your income. For single filers, the capital gains tax rate is 0% if you earn up to $40,000 per year, 15% if you earn up to $441,450 and 20% if you make more than that. This IRS worksheet can help you do the math.

If you owned your crypto for less than 12 months, the taxes you pay will be the same as your normal income tax rate.

If you sold your crypto for a loss, there's some good news. "What people don't always remember is that if you sell it, and you lost money, that's a write-off of the amount you lost," Weiss says. "It's important that people look for not just where they made money, but also where they lost money."

You can use your losses to lower your taxable income by a maximum of $3,000 ($1,500 for married filing separately) and can carry over any additional losses to future years.

If I only sold a little bit of bitcoin, do I still need to report it?

Yes. A profit of any amount needs to be reported to the IRS. For the first time, this tax season's 1040 form includes a question about virtual currencies on the front page asking taxpayers if "at any time during 2020, did [they] receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"

"The IRS thinks there's massive, massive underreporting in this area," Ryan Losi, a certified public accountant (CPA) with Piascik tells Make It. "And they're going to start targeting it."

Indeed, the cryptocurrency question is the first item on the 1040 form, just below the individual's contact information.

In the past, taxpayers may have been able to feign ignorance about their obligation to report crypto gains, but that won't fly anymore. "Everyone who signs the tax return is signing that under penalty of perjury from the U.S. government," Losi says. "Now folks can't say 'I didn't see the question' or 'it was buried on the document.'"

What if I spent my bitcoin at a retailer that accepts cryptocurrency?

Spending your bitcoin isn't all that different from selling it in the eyes of the IRS, especially if your holding has greatly increased in value since you first purchased it. The IRS website states that "the use of virtual currencies to pay for goods or services . . . generally has tax consequences that could result in tax liability."

If you purchased one bitcoin for $3,000 last March and then used the same coin — now worth more than $50,000 — to pay for a Tesla this week, you have to report capital gains on the transaction.

"What you've got there is a $47,000 capital gain," Losi explains. "The IRS is going to look at what the fair value of the coin is at the date of exchange and compare that to your tax basis, which is the date at which the bitcoin was acquired."

That means that unless you earn less than $40,000 a year, you can expect a tax hit on any item you purchased with your crypto.

Check out: Tax season started on February 12: Here’s why you should file as early as you can

Don't miss: The best credit cards for building credit of 2021

Source: Read Full Article

click fraud detection