Bitcoin and other cryptocurrencies are a very new asset and governments across the world are scrambling to work out how to deal with them.
However, if you make any money from buying and selling Bitcoin it’s considered a taxable asset and will be taxed relative to your income.
Before we jump into this it should certainly be said that I am not a tax accountant and you should probably contact a professional if you’re are worried about this.
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Cryptocurrencies to watch in 2018.
How Bitcoin investments are taxed
To pay the correct amount of tax on your investment (which is heavily advised) you’ll need to keep records of your transactions throughout the year. So each time you bought or sold Bitcoin, you’ll need to know how much of it you bought/sold, the date you bought/sold it on, and the price at which you bought/sold it for.
The exchange you use for crypto trading will have this information in your transaction history.
Now you’ll have to work out which investments are counted as short-term or long-term gains. If you bought Bitcoin and held it as an asset for over one year, it’s counted as a long term gain, and will be taxed at a lower rate than a short-term gain, which is held for under one year.
The level of tax you pay depends upon your income tax bracket, and you’ll be paying between 0% and 20% based on how much you earn throughout the year.
You will only pay taxes on a realised gain. A realised gain occurs when you turn your Bitcoin back into fiat money, but not before – so if the value of your bitcoin rises you won’t have to pay tax on that until you decide to turn it back into Dollars or Pound Sterling.
If you don’t manage to make any gains throughout the year, then you’ve probably made some losses. These are calculated in the same way the gains are, but the other way around. So if you lost $1,000 in a Bitcoin trade, you would be eligible for a tax refund proportional to your income level.
You can only write off a certain amount of money as a loss per year, the current cap being $3,000 annually set by the IRS.
The laws around cryptocurrency are going to be changing a whole lot over the next few years, so before you do anything, make sure you are up to date on current state of affairs – and if in any doubt, contact a professional.