Bitcoin and cryptocurrencies have always been met with a sense of uncertainty and dubiousness by the general population.
While some people seem to have understood Bitcoin in bits and pieces, they seem to be lacking in most of the Bitcoin-related fundamentals. Irrespective of your depth of knowledge on this subject, we would wager that you would significantly benefit from this article if you are looking to get in on the basics of Bitcoin Tax Rate.
What is Bitcoin?
Created in 2009, Bitcoin is a digital currency. It was developed on the ideas laid out in a whitepaper by a pseudonymous individual or group of individuals named Satoshi Nakamoto, whose true identity has yet to be uncovered.
Bitcoin promises to lower transaction fees than traditional online payment mechanisms and operates on a decentralized authority, which is not the case with conventional fiat currencies. Bitcoin was developed on Blockchain technology.
A Brief Introduction on Blockchain Technology
At a fundamental level, a Blockchain is a chain of blocks, where blocks are digital pieces of information. For a block to be added to a Blockchain, the following must take place.
A transaction, such as a purchase, must occur and be verified.
When you make your purchase, a network of computers verifies that your transaction took place the way that you maintain it did.
It confirms the details of the purchase, including the transaction’s time, total amount, and participants.
The transaction is stored be in a block. After your purchase has been confirmed, it is authorized to be stored in a block.
Once all a block’s transactions are verified, it must be assigned a unique, identifying code called a hash. The block is also allocated the hash of the most recent block added to the chain.
How does Bitcoin work?
Bitcoin employs a peer-to-peer (P2P) network to facilitate instant payments.
Individuals and companies who own the governing computing power, also known as "nodes," participate in the Bitcoin network, and are rewarded for contributing their computing power to the network with the release of a new Bitcoin.
Bitcoin mining is a process where Bitcoins are released into circulation. Mining usually requires that you solve computationally tricky puzzles to discover a new block that is added to the Blockchain.
Bitcoin Taxation and Bitcoin Tax Rates
In the US, Bitcoin, just like any other cryptocurrency, is considered property under federal tax law. In simple words, tax laws on assets like property are applicable to cryptocurrencies, as well.
The tax on the Bitcoin that you will have to pay depends on how long you have the Bitcoin (or any other cryptocurrency) with you. There are primarily two types of capital gains tax – long term and short term.
If you sell your Bitcoin within one year from the time you bought it, you will be subject to short term capital gains tax.
If you sell Bitcoin after one year from the time of purchase, you will be subject to a long term capital gains tax. This tax could be 0%, 15%, or 20%, entirely depending on your taxable income and your filing status.
With this in mind, it would be wise to keep your purchased Bitcoins for as long as possible, preferably for more than a year since the long-term capital gains tax is lower than short-term capital gains tax.
Your capital gain taxes ought to be reported on the 8949 form. The following situations will require you to know your Bitcoin tax rate.
Should Bitcoins be sold for fiat currencies such as the US dollar
Should Bitcoins be used to buy goods and pay for services
Should Bitcoins be swapped for other cryptocurrencies
You do not have to pay capital gains tax:
If you donate Bitcoins to tax-exempt charities and organizations
If Bitcoins are transferred amongst your wallets
If you buy Bitcoins with fiat currency like USD.
If you gift small amounts of Bitcoin that do not exceed $15k
If you lend Bitcoins to another party.
If you receive Bitcoins through Bitcoin mining or hard forks
Bitcoin Tax Calculators
To make dealing with Bitcoin taxes simple, consider using a Bitcoin tax calculator and possible a Bitcoin tax discount code.
Here are a few Bitcoin Tax calculators to ease the burden of dealing Bitcoin Tax Rates:
Bitcoin.Tax is a popular cryptocurrency tax software that caters to traditional crypto traders and investors to take care of their Bitcoin tax rates.
It allows crypto traders to import their transaction data from a plethora of major crypto exchanges. Bitcoin.Tax also includes mined digital coins in the balance.
However, it is limited by the fact that it looks somewhat dated when compared to other Bitcoin tax rate calculators.
Once you upload the data, this Bitcoin tax calculator prepares several reports that cove your crypto-based income and the capital gains from your cryptocurrency transactions. Then it produces a closing report that contains the net profit or loss during the tax year in question.
ZenLedger has proven to be an excellent solution if you have to deal with Bitcoin tax calculations.
ZenLedger is known to automatically calculate the value of your holdings in foreign exchanges and alerts you if your holdings trigger this requirement. Its tax-loss harvesting tool shows you how many unrealized capital losses you have in each token type.
Finally, it also boasts a comprehensive spreadsheet export that shows you every single transaction and how the corresponding tax is calculated.
Navigating the Bitcoin world has never been easier than it is now. With the plethora of Bitcoin tax calculators and software at your disposal, you should have no issues handling your Bitcoin tax rates. These are two of many Bitcoin tax tools that can make it easy for you to deal with Bitcoin tax rates.