Yes, it’s that time of year again. The new year is upon us and we all need to start gathering tax documents. Fun stuff, right? And if you’ve invested in bitcoin or sold bitcoin, then things get really fun.
The below list of items is meant to help you understand the most critical aspects for tax filing when it comes to bitcoin. And it should be noted that this specifically covers U.S. taxes (though U.K. regulations are very similar).
Here’s what you need to know:
1. Bitcoin Is Taxed As Property
That’s right, just like stocks, bonds or real estate. Although often used as currency, it is not treated like a currency for tax purposes. Every single time you sell, spend or exchange bitcoin, you have executed a taxable transaction. You have a capital gain or less every time you dispose of your bitcoin, unless it is by gifting it to someone.
I know what you’re thinking. Well, I know what I’m thinking, anyway: This necessitates a lot of detailed record keeping. In order to compute capital gains and losses, you need to know your original cost basis. Now, crypto exchanges will keep a history of all of your transactions, but they won’t be reporting your cost basis to you on any regular basis. In addition, if you’ve moved coins or taken self-custody, you really need to keep track of all your coins and their original costs. I’m thinking a nice Excel spreadsheet. And stay up on it regularly. Your tax accountant will be pleased.
2. Bitcoin Received From Mining Are Taxable
If you’re mining bitcoin, every coin you mine is taxable as ordinary income. Don’t let the word “ordinary” fool you. Ordinary income, in IRS parlance, is taxed at higher rates than long-term capital gains are. (“Long term” in the U.S. means you’ve held the asset for one year or longer.)
Not only is mining taxed as ordinary income, but also as self-employment income, so you’ll owe social security and medicare taxes as well.
Now, you get to write off all of your expenses associated with the mining operation, such as electricity, which is a big one. You can also write off the cost of the mining rigs over several years, and in some cases take a deduction for the entire cost in year one. That’s a nice benefit.
How do you tally up and report how much income you’ve generated, in U.S.-dollar terms? The IRS regulations say your income is the fair market value of the bitcoin you mine on the day you receive it. Thus, each day you have more income. Again, here comes a great Excel spreadsheet opportunity.
Now, if you mine bitcoin as a hobby, you can simply report the income on your tax return as “other income,” and as such, won’t pay self-employment taxes like social security and medicare. The downside, however, is that you won’t be able to write off any expenses against the income. If you do want to take the deductions, report the income and expenses on U.S. Schedule C.
Note: If you report income from mining, you now have a cost basis for the coins to use against future capital gains — more record keeping.
3. How To Answer “That Question” On Top Of Form 1040
Source: Technologymanias.com
Above is what the draft version of the 2021 Form 1040 “crypto question” looks like. Note that this is a slight change from 2020, when the question also included “sending” any cryptocurrency. If you only purchased bitcoin during 2021, you can answer “No.”
“At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
So, do you have to answer this? Yep, and you should answer it honestly. Will it get you audited? Probably not, since only .45% of taxpayers with incomes between $75,000 and $200,000 were audited in recent years. If you answer the question “Yes,” the IRS may look at your return and see that some bitcoin transactions are reported, capital gains and mining income, mainly.
4. Being Paid In Bitcoin, Or Paying In Bitcoin, Are Taxable Events
If someone pays you for your services in bitcoin, that is taxable as self-employment income. Your income is the U.S. dollar value of the coins you received on that day of payment. Like with mining, you then have a cost basis for those coins.
Likewise, if you pay someone else for their services with bitcoin, you have just disposed of some coins. As such, you have either a capital gain or capital loss on the transaction.
5. Paying For Starbucks With Bitcoin Is A Taxable Transaction
Though Starbucks makes some amazing drinks, you really shouldn’t pay for them in bitcoin because, yes, it is a taxable transaction, every time you spend your bitcoin. Your next question: “Is there a de minimis exception for such a small transaction?” No, not at this time.
And that, in a nutshell, is the problem of having a property that acts like a currency, and a currency that acts like a property. There is not yet a user-friendly system of taxation to handle all Bitcoin transactions fluidly.
6. You Can Deduct Losses From Trading Bitcoin, But…
Capital losses from trading any asset can be used to offset capital gains, whether the gains were from bitcoin, stocks, real estate or any property. That’s the good news. If you’ve suffered some losses in bitcoin, but had gains in stocks, or vice versa, you can offset.
If you didn’t have any gains to offset, or your losses are greater, you can still deduct some this year. Taxpayers can deduct up to $3,000 per year in capital losses that exceed your gains. That’s not much, I know. However, you can carry these losses forward to deduct against profits in future years.
7. Exchanging Bitcoin For Other Cryptocurrencies Is Taxable
A like-kind exchange is where one asset is exchanged for another similar one, typically two parcels of real estate. But there is no provision for “like-kind” exchanges for cryptocurrencies. This tax provision enables the seller to defer paying capital gains taxes on the profit until a time when the second asset is sold.
8. Do Bitcoin Exchanges Report Transactions To The IRS?
Cryptocurrency exchanges do not report sales of assets in the same manner as do stock brokerages. Every sale of stock or mutual funds is reported, so you must show each sale on your tax return, even if the sale doesn’t result in a gain. Tax reporting by cryptocurrency exchanges is, at this time, a mixed bag. And that is something that the U.S. government wants to wrap its arms around.
For example, Coinbase, the largest U.S.-based exchange, will not be issuing Form 1099-K or Form 1099-B to report sales of cryptocurrency. Thus, none of your sales proceeds are being shared with the IRS. You have the sole responsibility of reporting all of your sales proceeds and cost basis. The only transactions that Coinbase reports are rewards or fees that you may have earned during the year, and only if they exceed $600. Those are reported on form 1099-MISC.
Gemini takes a completely different approach. The company views itself as a third-party settlement organization (TPSO) and as such files Form 1099-K for certain transactions. (A 1099-K is usually filed by merchant services companies to report funds sent to retailers.) Gemini will only report if your sales of digital assets exceeded 200 transactions in a year and exceeded $20,000 in proceeds.
Binance, a Malta-based company, does not report to the IRS, and is actually no longer serving U.S.-based traders. Binance had previously issued Form 1099-K to certain traders.
9. Generally, You Don’t Have To Pay Taxes On Bitcoin Donations To Charity
Though by giving your bitcoin to a charity you’ve actually disposed of it, you will generally not pay taxes on the transaction, even if the coins have gone up in value. Even better, you may be able to take a deduction as a charitable contribution in the amount of the fair market value on the date of the donation — win-win. You can’t say that very often with regards to taxes.
If someone gifts you some bitcoin, good for you. Best of all, it’s not a taxable transaction to you — a win-win, again. When you dispose of the coins in the future, your cost basis will be the same as the person’s who gifted it to you. So, in that case, a little communication will be necessary.
10. Key Points To Remember
Taxes can get pretty complicated with bitcoin. Key points to remember:
Every time you dispose of bitcoin, it triggers a taxable event
Keep accurate, thorough records of all buys and sells
Don’t expect your bitcoin exchange to give you a nice, neat yearly summary
Seek professional help (tax help that is) in an accountant who knows the bitcoin landscape
This is a guest post by Rick Mulvey. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Cryptocurrency investments are subject to market risks, and individuals should seek professional advice before making any investment decisions.
The founder of the decentralized exchange, dYdX, asserts that individuals involved in cryptocurrency development should direct their efforts toward international markets beyond the United States for the upcoming five to ten years.
Antonio Juliano conveys to his audience of 49,400 on the social media platform X that the prevailing regulatory uncertainty within the United States does not merit the associated challenges or concessions.
Juliano contends that it would be more prudent for cryptocurrency developers to establish their products in alternative countries and subsequently re-enter the United States from a position of strength.
“Cryptocurrency developers would be well-advised to temporarily discontinue catering to the US market and instead seek re-entry in a span of 5-10 years. The complications and compromises involved do not warrant the endeavor. Moreover, a substantial portion of the market exists overseas. It is recommended to innovate in those regions, ascertain product-market fit, and then return with greater bargaining power…
The paramount objective shared among all stakeholders is to secure a significantly more potent product-market fit for cryptocurrency. The pursuit of a robust product-market fit does not necessitate flawless distribution. A multitude of substantial overseas markets present avenues for experimentation.”
Juliano articulates that advocating for more amiable cryptocurrency regulations demands time, although the process could be expedited if developers manage to introduce products that elicit consumer demand.
“However, this perspective does not undermine the importance of efforts to influence US cryptocurrency policy. On the contrary, such endeavors are absolutely vital. Given the protracted timeframe required (in anticipation of re-entry), and considering that much of the world takes cues from the United States, it becomes evident that our progress in shaping policies hinges upon achieving global-scale product usage.”
The dYdX founder proceeds to emphasize that, with time, American citizens will come to realize that cryptocurrency is inherently aligned with US values and principles.
“The tenets of cryptocurrency closely align with American values. What concept could be more quintessentially American and reflective of capitalist ideals than a financial system conceived for the people, driven by the people, and answerable to the people? This, indeed, constitutes the very essence of our endeavor.”
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Cryptocurrency investments are subject to market risks, and individuals should seek professional advice before making any investment decisions.
Bloomberg Intelligence’s senior macro strategist, Mike McGlone, is conveying a pessimistic outlook for Bitcoin (BTC) in the immediate future.
During a recent interview on Kitco News, McGlone underscored that Bitcoin is currently displaying bearish signals even amidst the ascent of other high-risk assets.
“In the event of a downturn, adhering to a rule prevalent in bear markets, resources across the board could witness a reduction in value, and Bitcoin will not be an exception.
A crucial observation is the necessity for Bitcoin to exhibit divergent strength at a certain juncture, akin to the behavior of treasury bonds and gold in a deflationary economic environment. Regrettably, this pattern has not materialized.
After attaining its peak towards the conclusion of Q1, reaching approximately $31,000, driven by optimism and the influence of exchange-traded funds (ETFs), Bitcoin subsequently retraced to $25,000 or approximately $26,000. Presently, it is manifesting divergent weakness in contrast to the concurrent upsurge in the stock market.”
According to McGlone’s analysis, the ongoing “economic reset” implies a continuation of Bitcoin’s recent downward trend, although he anticipates that the premier cryptocurrency will ultimately attain a six-figure valuation.
“While I believe that Bitcoin will eventually achieve a valuation of $100,000, the onset of a global economic reset, as I anticipate, characterized by a standard deflationary recession leading to a decline in the housing and stock markets, analogous to the conditions of 2008—though arguably exacerbated due to the ongoing removal of liquidity from the system—Bitcoin’s role as an influential precursor comes to the forefront.
This underscores my point that Bitcoin has recently been taking on the role of a harbinger of trends. Its value ascended briefly to around $31,000, only to subsequently trend downwards. From my perspective, it serves as a leading indicator for a majority of high-risk assets.”
As of the time of writing, Bitcoin is trading at $26,079.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Cryptocurrency investments are subject to market risks, and individuals should seek professional advice before making any investment decisions.
Shiba Inu’s (SHIB) Latest Layer-2 Scaling Solution Nears Public Relaunch Following Recent Technical Challenges
Shytoshi Kusama, the enigmatic lead developer behind the SHIB project, has shared in a recent blog post that significant progress has been made in addressing the technical setbacks that temporarily halted the operation of Shibarium, SHIB’s new layer-2 scaling solution. The initial release of Shibarium encountered network issues that prompted its temporary closure. However, Kusama assured the community that diligent testing and parameter adjustments have led to notable improvements.
Kusama elaborated, stating, “After extensive testing and parameter refinements aimed at achieving a ‘ready’ status, Shibarium has undergone enhancements and optimization. While still undergoing testing, it is now successfully producing blocks.” Additionally, to prevent a recurrence of the past network overload, Kusama revealed the implementation of a new monitoring system and supplementary fail-safe measures. These include rate limiting at the RPC (remote procedure call) level and an automated server reset mechanism in the event of another surge in traffic.
With these advancements in place, the team is on the verge of reopening Shibarium to the public. As part of this progression, more network validators will be integrated into the ecosystem on August 23rd. Kusama emphasized the significance of this step, remarking, “Tomorrow, additional validators will become operational, expanding the options available for staking BONE. This will allow for a distribution of rewards earned through their roles within our community. As testing concludes, we will once again prepare for public utilization.”
Shibarium’s previous technical difficulties were attributed to an overwhelming influx of users and transactions during its initial launch. As of the current writing, SHIB is trading at $0.00000798, marking a 0.4% increase over the past 24 hours.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Cryptocurrency investments are subject to market risks, and individuals should seek professional advice before making any investment decisions.
FTX’s co-founder, Sam Bankman-Fried, is currently seeking a temporary release from incarceration. The purpose behind this endeavor is to engage in collaborative strategizing with his legal representatives within the confines of the federal courthouse situated in Manhattan.
In a formal letter dispatched to US District Judge Lewis Kaplan on a Friday, Bankman-Fried’s legal team expounded that their client’s capacity to effectively scrutinize the extensive legal documents pertaining to his case has been significantly curtailed during his time spent incarcerated at the Metropolitan Detention Center (MDC) in Brooklyn.
Christian Everdell, the attorney representing Bankman-Fried, divulged that the government recently disseminated a voluminous three-quarters of a million pages of Slack communications. These were originally due several months prior. Expressing the urgency of the situation, Everdell articulated, “Only last week did the government furnish an aggregate of approximately seven hundred and fifty thousand pages of Slack communications that were originally stipulated for release months ago. Given the current timeline, it is a futile endeavor for Mr. Bankman-Fried to endeavor to review these materials.”
He underlined the pivotal necessity for Bankman-Fried to collaborate meticulously with his legal team, emphasizing his dire need to avail himself of an internet-enabled laptop within the courthouse premises. Such a resource would undoubtedly expedite the process of comprehensive document review, an imperative undertaking in light of his impending fraud trial scheduled for the forthcoming October.
In riposte to Bankman-Fried’s plea for reprieve, the prosecuting body voiced apprehensions regarding his adherence to the prerequisites concerning his planned defense strategy. Notably, they underscored that Bankman-Fried is yet to furnish the complete gamut of essential information regarding the counsel upon which he predicated his actions.
The prosecutors proffered caution that unless Bankman-Fried promptly discloses the minutiae regarding the counsel he received and the provenance thereof, any attempt to interject such a defense during the trial should be summarily proscribed.
Although the prosecutors extended an offer to facilitate the transfer of documents onto hard drives for Bankman-Fried’s perusal within the MDC premises, a viable laptop-based solution was deemed unattainable. Initially, the notion of relocating Bankman-Fried to a more compact, upstate correctional facility where he could access an internet-enabled laptop was contemplated by the prosecutors. However, this proposal was met with resistance from prison officials.
Regarded for its starkly onerous conditions, the Metropolitan Detention Center has cultivated a notorious reputation among its inmate population.
Bankman-Fried’s Incarceration Stemming from Unsanctioned Internet Utilization
As documented, Judge Kaplan sanctioned the re-imprisonment of the beleaguered cryptocurrency luminary, citing alleged instances of witness tampering.
In that juncture, Judge Kaplan pronounced that a strong prima facie case existed indicating that the accused had endeavored to tamper with witnesses on no fewer than two separate occasions.
The decision was additionally influenced by Bankman-Fried’s unsanctioned use of the Internet while released on bail under the guardianship of his parents at their abode located in California.
Judge Kaplan discerned that Bankman-Fried had indulged in excessive communication with various individuals via electronic correspondence, even resorting to the utilization of a virtual private network.
Concurrently, the disgraced progenitor of FTX is simultaneously grappling with novel allegations brought forth by the Department of Justice (DOJ). These allegations encompass the misappropriation of customer deposits, including the purported embezzlement of said funds.
An indictment filed on the most recent Monday delineates that Bankman-Fried stands accused of diverting and embezzling customer deposits from the FTX platform. The illicitly obtained funds were purportedly channeled towards political campaign contributions, collectively amassing a substantial sum exceeding one hundred million dollars, in advance of the 2022 US midterm elections.
The indictment further posits that despite Bankman-Fried’s intimate knowledge of FTX’s fiscal insufficiencies, he continued to channel the purloined funds into personal investments, acquisitions, and political campaign contributions.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Cryptocurrency investments are subject to market risks, and individuals should seek professional advice before making any investment decisions.
The U.S. Securities and Exchange Commission (SEC) is taking significant steps towards pursuing an appeal in their recent legal battle against Ripple, indicating a potential shift in the course of the lawsuit.
James K. Filan, an experienced defense attorney specializing in crypto-related legal matters, has shed light on the latest developments. District Judge Analisa Torres has initiated a structured process for considering the SEC’s request to present an interlocutory appeal—a move that would allow the SEC to contest certain aspects of the ongoing case.
It’s important to note that this preliminary step does not guarantee the authorization of an interlocutory appeal; rather, it signifies that the SEC has been given the opportunity to formally request such an appeal.
Judge Torres has outlined the timeline for this process in her official order. The SEC is expected to file their motion for the appeal by August 18th. Subsequently, Ripple is given until September 1st to submit their opposition papers. If the SEC deems it necessary, they have until September 8th to file a reply.
The news of these developments had an immediate impact on the cryptocurrency market. Following the announcement of the judge’s order, the value of XRP experienced a sharp decline. The price, which had been trading at approximately $0.571, dropped to around $0.499 at the time of writing. This decrease of over 12% aligns with the broader trends observed across the cryptocurrency landscape.
The legal clash between the SEC and Ripple began when the regulatory agency filed a lawsuit against the San Francisco-based payments company in late 2020. The SEC alleged that Ripple had engaged in the sale of XRP without registering it as a security.
In a significant turn of events last month, Judge Torres issued a ruling that had mixed implications for both parties. She determined that Ripple’s automated programmatic sales of XRP, which occurred on the open market, could not be classified as securities offerings—a pivotal point of disagreement between the SEC and Ripple.
However, the judge did uphold a key aspect of the SEC’s argument. She agreed with the agency’s assertion that Ripple’s direct sales of XRP to institutional buyers indeed amounted to a securities offering, reinforcing the complexity of the case.
As the legal battle continues to unfold, the spotlight remains on the actions and responses of the SEC and Ripple, and how their ongoing dispute could shape the future regulatory landscape for cryptocurrencies and digital assets.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Cryptocurrency investments are subject to market risks, and individuals should seek professional advice before making any investment decisions.