Bitcoin is a digital currency dating back to 2008, and being relatively new, ways of dealing with it are often changing. Worldwide and even within the United States, there is debate about whether it can be considered an actual currency. However, even though it is new, bitcoin transactions are considered tax events and therefore are subject to taxation in the United States. Let’s look at what this might mean for individuals who are filing their taxes and who own or have received this new form of currency.
If your employer pays you in bitcoin, you might, for example, earn $2300 a month in dollars and $200 in the best bitcoin wallet. Income as bitcoin valued in dollars would be taxed in the usual way, regardless of the new form in which the dollars appear. it may also be taxed as self-employment income.
As for ownership, trading or donation of this digital currency, it is treated as property or capital gains so you would be filing for capital gains taxes. This means that you would want to keep track of its value in the local fiat currency. This can be a complicated process, although there are now tax professionals who can work through this with you.
Where the Best Bitcoin Wallet is Taxed
An interesting aspect of tax filing for digital currencies defined as capital gains, is that you can make money on a trade, so that if you buy $400 in this digital currency and sell it for $500 you have made $100. There might be no taxation or fees if this trade occurs within one year and your income is below a certain level. In any case, such a trade should be declared on your tax return. You may also take a loss in an exchange and receive tax benefits as you would from any capital gains loss.
On the downside, there may be fees associated with the transfer of your best bitcoin wallet into dollars, and the process of determining the value of the bitcoin can be complex. Things to consider would be – when you made a trade, what the exchange value of the currency was at that time, whether to consider it short-term or long-term assets, whether you have gained or lost in a trade, whether you have traded one alt-currency for another. Again, tax professionals can help a lot with this.
Specifically, in the United States, you would use Schedule D of the 1040 form to declare trades of your bitcoin wallet. If you made $2500 dollars on a sale of BTC, you would declare this as income. In general, the IRS expects you to declare all trades with bitcoin, no matter how small. How long you have held the BTC would, however, be a factor in determining your tax rate.
How is bitcoin taxation handled in other countries? You would be surprised to learn how much variety there is in countries worldwide in terms of how cryptocurrency taxation is handled. In October of 2015 the European Union decided not to tax digital currency, so it is exempt from the VAT (Value-Added Tax) there. In China, bitcoin is very popular. The Chinese citizen has the right to own bitcoin, but banks are not permitted to exchange BTC. It’s not clear whether bitcoin is taxed, but if it is, most likely it is taxed as an asset. The same thing is true in Norway, where bitcoin would be taxed as property under the wealth law.
Because digital currency is a newcomer on the scene worldwide, countries vary greatly in terms of their perception of its legality, and some nations have assumed that bitcoin users have criminal intent. As the use of cryptocurrency grows, however, it becomes clear that it is simply another valid and lawful medium of exchange. In general, worldwide, it is legal and of lawful to trade with bitcoin. It may be considered barter, and it may be defined as wealth or capital gains.
There are only a few countries that have partially banned it, one example being Iceland. Others have tried to ban it but without a lot of energy, as its use is growing. Tax regulations, it seems, have not kept up – or not yet kept pace – with the growing use of digital currencies. As one reddit user put it, such exchanges are by definition lawful, even if they are not regulated or taxed. Where it is taxed, as we see in the United States, the business of taxation is exceedingly complex. Nevertheless, the latest regulations suggest that trading with bitcoin in any amount is taxable.