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In order to understand the taxation policy associated with Bitcoins, let us first begin with some important questions, which you might find helpful-
- Many people state that Bitcoin is a cryptocurrency. Therefore, does the taxation policies of a fiat currency apply to it?
- Others comment on Bitcoin as some form of digital gold. Does the crypto is taxed in the same way as precious metals are?
- People also think of Bitcoin as some form of a commodity similar to oil. This begs the question, is Bitcoin taxed like commodities?
The reason I started this article with these three questions is to make people understand the fundamentals of Bitcoin. Answering the fact around what kind of currency it really is, allows us to understand the taxation logic behind it easily.
Bitcoin and Taxation: Meaning and Introduction
There is a reason why Wall Street is going gaga over Bitcoins. Apart from the high rate of growth, Bitcoin is subject to the best tax laws in the US. In other words, it is on par with investing in real estate and other properties.
This means that if you are investing in Bitcoins over the long run, all the profits you derive will be subject to long-term capital gains. This makes it very favorable as a long-term investment, promising great returns and low rates of taxations.
According to the IRS, Bitcoin taxation is similar to stocks. Just to give you an example, you are taxed 15% if you make gains over a long period. However, if you earn nearly $500K in gains, you have to pay 20%. This is still much less than the taxes on other assets, currencies and commodities. You can use bitcoin-profitapp.com to know more.
List of 4 Important Things you need to know about Bitcoin Taxes in the USA
1. The longer you hold your Bitcoins, the lesser is the tax you pay-
As the government considers Bitcoin in the same wavelength as stocks, it does not want volatility to affect markets. This is why the government incentivizes people to hold on to their Bitcoin investments for some time.
This stops market fluctuations and does not incentivize short selling. This means it is a great idea to hold on to your Bitcoin investments if you want to pay lesser taxes.
2. Bitcoin has an advantage over Gold and Fiat Currencies on taxation laws-
In the USA, gold is taxed at 28% when you try to sell it. This means that as compared to the 15% on Bitcoins, you are paying nearly 13% more when you invest in gold and are looking to sell the same.
When it comes to investing in currencies, investors are looking at an eye-watering figure of 37%. This is something, which even the dumbest investors stay away. From an investor standpoint, Bitcoin promises the highest tax breaks.
3. You need to report Bitcoin transactions in US Dollars to the IRS-
Many people are confused about the exact nature of how they should file returns on Bitcoin. According to the IRS website, people need to calculate their Bitcoin transactions in US dollars for the taxation period and report the same.
Even though the IRS stipulated Bitcoins be in the same league as property tax in 2014, you need to file your returns for the previous years as well. The IRS has sent individuals letters concerning the same.
4. Taxes for Bitcoin Traders need special considerations-
A common question, which is raised is how traders who deal with Bitcoins are taxed. The IRS states that traders who are buying and selling Bitcoins in a single day need to maintain some level of consistency in their reporting.
For example, they should try to use the same price point (or as close as possible) for buying and selling on one single day. The IRS understands that there are price fluctuations and hence there is some level of ease on this front.
The Final Word
Even though Satoshi Nakamoto was against Bitcoin being taxed by any authorities, it is very difficult to say no to the IRS or any other similar authority in any part of the world. However, for an investor, being in the same bracket as property makes Bitcoin a favorable investment asset.
