This is a question often surrounded by confusion, so here's a quick explanation!
The basics for a new user
If you decide to cash out your Bitcoin using a broker exchange (such as Coinbase), then it will normally take about 1-5 days for the money to reach your account. For EU customers, payments are made via SEPA (withdrawals paid in Euros). However, if you want to sell Bitcoin for USD, brokers normally use the SWIFT payment method. Bitcoin may be the best form of money we have ever used. The table below represents how bitcoin and cryptocurrencies, in general, compare to gold and sovereign currency as money. Note: This chart doesn’t take into account that bitcoin has fungibility issues which make both gold and fiat better in that particular category. Free Bitcoin Faucet. Free Bitcoin Faucet is an absolutely free bitcoin place that gives you up to $100 btc in 5 minutes.Every time you visit the faucet, you can get the maximum number of Satoshis between 2 to 10 Million. There are several ways to convert bitcoin to cash and ultimately move it to a bank account: Sell bitcoin on a cryptocurrency exchange, such as Coinbase or Kraken. This is the easiest method if you want to sell bitcoin and withdraw the resulting cash directly to a bank account. If you’re just looking on how to invest in Bitcoins, sign up with Coinbase and get started. By using THIS LINK you’ll get $10 in bitcoins after you buy $100 in Bitcoins. If you don’t like this idea – check out Stockpile. You can buy fractional shares of Bitcoin using the fund GBTC. You get $5 for free by opening an account at Stockpile.
As a new user, you can get started with Bitcoin without understanding the technical details. Once you've installed a Bitcoin wallet on your computer or mobile phone, it will generate your first Bitcoin address and you can create more whenever you need one. You can disclose your addresses to your friends so that they can pay you or vice versa. In fact, this is pretty similar to how email works, except that Bitcoin addresses should be used only once.
Balances - block chain
The block chain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. It allows Bitcoin wallets to calculate their spendable balance so that new transactions can be verified thereby ensuring they're actually owned by the spender. The integrity and the chronological order of the block chain are enforced with cryptography.
Transactions - private keys
A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast to the network and usually begin to be confirmed within 10-20 minutes, through a process called mining.
Processing - mining
Mining is a distributed consensus system that is used to confirm pending transactions by including them in the block chain. It enforces a chronological order in the block chain, protects the neutrality of the network, and allows different computers to agree on the state of the system. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. These rules prevent previous blocks from being modified because doing so would invalidate all the subsequent blocks. Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively to the block chain. In this way, no group or individuals can control what is included in the block chain or replace parts of the block chain to roll back their own spends.
Going down the rabbit hole
This is just a short summary of Bitcoin. If you want to learn more of the details, you can read the original paper that describes its design, the developer documentation, or explore the Bitcoin wiki.
© R.Tsubin/Getty Images Although used as a currency, Bitcoin is taxed like an investment, and you might be liable for any profits made when you sell or spend it. R.Tsubin/Getty Images- The IRS considers Bitcoin to be property rather than money, so transactions are subject to the same tax treatment as other investments.
- Bitcoin taxes can be triggered by trading, exchanging, or simply spending the cryptocurrency, so documenting everything is essential.
- Bitcoin is taxed at the special capital gains tax rate, which is often less than the ordinary income tax rate.
Bitcoin seems to be everywhere these days. From its mysterious origins in 2008, it has grown into a widely accepted currency, used for everything from investing to shopping to employees' wages.
But many Bitcoin users don't realize that buying/selling, exchanging, and even using Bitcoin to pay for things has tax implications. Yes, you read that last phrase right. In some cases, just spending your Bitcoin could be considered a profitable investment - and taxable.
From how exactly it's taxed to how to prepare for filing, here's what you need to know about Bitcoin taxes.
How Bitcoin is taxed
Bitcoin and its comrade cryptocurrencies (Ethereum, Ripple, Tether, and Litecoin) appeal to users because they are secure and provide a degree of anonymity. It's that anonymity, along with the growing value of cryptocurrency transactions taking place worldwide, that has increasingly drawn attention from the Internal Revenue Service (IRS) in recent years.
Since you can use Bitcoin and other cryptocurrencies for everything from online shopping to donating to charity, you might assume the IRS treats cryptocurrency like cash. That assumption can get you into hot water.
According to IRS Notice 2014-21, the IRS classifies cryptocurrencies as property, not cash or currency. That means it treats Bitcoin transactions like sales of stocks and other investments. Purchasing cryptocurrency with cash and holding on to it isn't a taxable transaction, but selling, exchanging, or using it to purchase goods and services is.
For example, say you purchase 10 crypto coins for $10 (basically, $1 apiece) on December 1, 2020, and load them onto a cryptocurrency debit card. On December 20, 2020, that cryptocurrency is trading for $5 per coin, up from the $1 per coin you paid for it back at the beginning of December. On that day, you use your cryptocurrency debit card to pay for a $5 cup of coffee.
On your 2021 tax return, you are supposed to report a $4 short-term capital gain ('short-term' because it happened within one year). That's the $5 per coin value you received when you purchased the cup of coffee, minus your $1 per-coin basis (what you paid for it) in the cryptocurrency.
That's a level of record keeping that few taxpayers are willing to keep up with - if they're aware of the requirement at all.
Why is Bitcoin taxed?
According to a survey conducted by The Harris Poll on behalf of Blockchain Capital, roughly 9% of American adults own Bitcoin. However, the IRS estimates that only a tiny percentage of them report crypto-related gains and losses on their tax returns.
In 2017, the IRS searched its database for the 2013 through 2015 tax years. It found:
- 807 individuals reported cryptocurrency transactions in 2013
- 893 individuals reported cryptocurrency transactions in 2014
- 802 individuals reported cryptocurrency transactions in 2015
That discrepancy is why the IRS is making cryptocurrency taxes an enforcement priority in 2021. In fact, Form 1040 for the 2020 tax year includes a question about cryptocurrency on the front page. It asks whether you've received, sold, sent, exchanged or otherwise acquired a financial interest in any virtual currency.
If you check 'no' to this question when you did, in fact, engage in cryptocurrency transactions, the IRS can consider that a willful attempt to avoid taxes, and you could face harsher penalties if the IRS uncovers your omission.
How to prepare and report Bitcoin tax filing
The IRS taxes Bitcoin as an investment. That means it's subject to the same tax rate of capital gains and losses that other financial assets are subject to when you sell any holdings in it, realizing a profit or loss.
Video: Taxing Bitcoin: The IRS wants people to disclose virtual currency activity (CNBC)
Step 1: Gather information for Bitcoin tax reporting
For each transaction, you need to know the following:
- The amount (in dollars) you spent to buy the cryptocurrency
- The date you purchased (or received) them
- The date you sold or exchanged the coins
- The amount in dollars the cryptocurrency was worth when you sold it (or value you received in the exchange)
When you sell stocks, at the end of the year, your broker will send you a Form 1099-B that includes all of the necessary information to report those sales on your tax return. But don't expect the same service from a cryptocurrency exchange. Most crypto exchanges only send 1099 forms to customers with gross payments over $20,000 or more than 200 cryptocurrency transactions during the year.
However, you can typically generate reports through your cryptocurrency exchange platform that will include all buys, sells, sends, and receipts of cryptocurrency from the account. If all of your cryptocurrency transactions take place on one exchange, gathering the information you need for tax reporting should be relatively easy. If your cryptocurrencies are scattered across several exchanges, you'll need to download separate reports from each of them.
Step 2: Calculate your Bitcoin gains and losses
Once you have all of the information on your cryptocurrency activity during the year, you need to determine whether you incurred a gain or loss on each transaction. To do this, you'll need to decide which method you'll use to value the cryptocurrencies you sell. Your options are:
- First-in-first-out (FIFO). The coins you purchase first are the ones you sell first.
- Specific identification. You select which coins you're disposing of in each transaction.
The method you choose can greatly impact the amount of taxes you end up owing in a particular year.
Say you purchase 100 crypto coins for $1 each on January 1, 2021, and another 100 coins for $20 each on June 1, 2021. On February 1 of the following year, you sell 40 coins for $15 each.
Using the FIFO method assumes the 40 coins sold came from the January 2021 lot. As a result, you would have a long-term gain of $560. That's 40 coins at $15 each less 40 coins at $1 each, or $600 - $40 = $560.
How Do I Get Money From Bitcoin
Using the specific identification method, you could decide that the four coins sold in February of 2022 came from the lot purchased in June of 2021. In that case, you would have a short-term loss of $200. That's 40 coins at $15 each less 40 coins at $20 each, or $600 - $800 = -$200.
Some cryptocurrency exchanges provide a gain/loss report. However, these reports are typically only provided on the FIFO method, so you won't be able to benefit from using the specific identification method if you rely on them.
Step 3: Report your Bitcoin transactions
Capital gain transactions are reported on IRS Form 8949. The form is divided into two sections:
- Cryptocurrencies held for one year or less go in the short-term section. Short-term gains are taxed at the same rates as ordinary income, with the top rate being 37%.
- Cryptocurrencies held for longer than one year go in the long-term section. Long-term gains qualify for more favorable long-term capital gains rates, which cap out at 20%.
How To Get Money From Bitcoin Wallet
How To Get Money From Bitcoin
Include your totals from Form 8949. If you sold other non-crypto investments, report those on a separate Form 8949. Carry the totals from all 8949 forms to IRS Schedule D.
The financial takeaway
You might have figured that investing in Bitcoin could have tax implications, especially if you make a profit on it. But it might surprise you to know that just spending your Bitcoin could trigger that taxable profit.
Purchasing cryptocurrency with cash and holding on to it isn't a taxable transaction, but selling, exchanging, or using it to purchase goods and services is.
Tracking the ins and outs of cryptocurrency transactions can be challenging. If you own cryptocurrency and have many transactions, it's a good idea to talk to a CPA or other tax professional familiar with cryptocurrency tax reporting. They may be able to recommend software to help track transactions and ensure you're properly accounting for them on your tax return.