Bitcoin has gained popularity as a digital currency in recent years. While it has become a popular form of investment, it also raises questions about how it is taxed by the US government. The Internal Revenue Service (IRS) views bitcoin as property for tax purposes, rather than as currency, and therefore taxes it differently than traditional currency.
When a taxpayer receives bitcoin as payment for services or goods, it is considered income and is taxed as such. The value of the bitcoin at the time of receipt, measured in US dollars, is used to determine the amount of income. The taxpayer is required to report the income on their tax return, just as they would if they received payment in any other form.
If a taxpayer buys or sells bitcoin, they are subject to capital gains tax. Capital gains tax is a tax on the increase in value of an asset that is sold. When a taxpayer purchases bitcoin, they establish a basis in the asset, which is the purchase price plus any associated fees. When they sell the bitcoin, the difference between the sale price and the basis is the gain or loss, which is taxable. If the taxpayer held the bitcoin for more than a year before selling it, the gain is long-term and is taxed at a lower rate than short-term gains.
If a taxpayer mines bitcoin, the income from mining is taxed as ordinary income. The value of the bitcoin at the time it is mined is used to determine the amount of income. The taxpayer is required to report the income on their tax return.
If a taxpayer receives bitcoin as a gift, the value of the bitcoin at the time it is gifted is not subject to income tax. However, if the taxpayer sells the bitcoin, they are subject to capital gains tax on any gain.
One unique aspect of bitcoin taxation is the concept of “forks”. A fork occurs when a blockchain splits into two separate chains, resulting in new cryptocurrency being created. If a taxpayer owns bitcoin at the time of a fork, they may be entitled to receive new cryptocurrency. The value of the new cryptocurrency is considered income and is taxed as such.
It is important for taxpayers to keep accurate records of their bitcoin transactions for tax purposes. This includes the date of the transaction, the value of the bitcoin at the time of the transaction, and any associated fees. Failure to report bitcoin transactions accurately can result in penalties and interest.
In summary, the US government taxes bitcoin as property, rather than as currency. Bitcoin transactions, including income, capital gains, and mining income, are subject to taxation. Taxpayers are responsible for accurately reporting their bitcoin transactions on their tax returns and keeping accurate records.