Do you have to pay taxes on bitcoin ?
Coinbase Tax Case Ruling a Boost to IRS
Do you pay taxes on bitcoin gains ? This is serious question now on account of latest ruling by a federal court judge U.S. of District Court for the Northern District of California U.S. v. Coinbase 17-01431 that covers transactions inbetween 2013 and 2015 compels San Francisco-based Coinbase to obey with a summons that requires it to identify accounts that conducted bitcoin transactions—either exchanging bitcoin for dollars, or sending or receiving coins from another bitcoin user—worth $20,000 or more. Estimated accounts affected are 14,355 rumored to have accounted for almost 9 million transactions.
How IRS view Bitcoin for taxation purpose ?
IRS has issued public notice Notice 2014-21 ter which it has announced to treat the virtual currency spil property. So if you have a holding of virtual currency , it will be treated spil any other investment and capital asset te your forearm. On the nature of virtual currency , the notice waterput the question and response spil under :
Q-1: How is virtual currency treated for federal tax purposes?
A-1: For federal tax purposes, virtual currency is treated spil property. General tax principles applicable to property transactions apply to transactions using virtual currency.
Q-2: Is virtual currency treated spil currency for purposes of determining whether a transaction results ter foreign currency build up or loss under U.S. federal tax laws?
A-2: No. Under presently applicable law, virtual currency is not treated spil currency that could generate foreign currency build up or loss for U.S. federal tax purposes.
Bitcoin Capital Gains
If you invest ter bitcoin mining and hold the virtual currencies for investment purpose , any transfer , sale or exchange with another property may result te build up or loss depending upon the the fair market value of property received te exchange. If virtual currency value is less than the value of the property , difference will be your capital build up , if not it will be capital loss.
If you hold the virtual currency for more than one year before selling or transferring or exchanging , resultant build up or loss will be terms spil long term gains or loss. IF held for less than 12 months, it is brief term capital gains or loss.
The Tax Cuts &, Jobs Act Effect on Virtual Currency
Section 1031(a)(1) of the US Code 26 provides exemption from tax when a property is exchanged for similar type property. For ready reference the provision of law is given below :
(a) Nonrecognition of build up or loss from exchanges solely ter zuigeling
No build up or loss shall be recognized on the exchange of property held for productive use ter a trade or business or for investment if such property is exchanged solely for property of like kleuter which is to be held either for productive use te a trade or business or for investment
So it wasgoed an arguable case that the if bitcoin (a property ) is exchanged for say Litecoin or Etherium , a person may argue that section 1031 applies to such exchange and gains are not taxable .
However , Sec. 13303 of the recently passed The Tax Cuts and Jobs Act , amended IRC Section 1031 (a)(1) to delete the word “property” and substitute it with “real property” … resum from final bill
This amendment therefore eliminates possibility of argument that when you exchange one virtual currency to another , it is not recognizable under section 1031 of US Code 26
Virtual Currency Accepted For Price of Goods or Services
If a person receives the virtual currency spil a price for goods or services, IRS made it clear that te such case the recipient will have to come in Fair Market Value of the said currency te dollar terms on the date of receipt. IRS further clarified that if a virtual currency is listed on an exchange and the exchange rate is established by market supply and
request, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which ter turn can be converted into U.S. dollars) at the exchange rate, te a reasonable manner that is consistently applied.[ refer question Five of notice 2014-21]
Mining of Bitcoins or Virtual Currency
When a taxpayer “mines” virtual currency , he/she is awarded with some virtual currency like bitcoins or others spil prize. IRS has clarified that , the fair market value the virtual currency spil of the date of receipt should be included te gross income of the person ter the year of receipt.
The individual who “mines” virtual currency spil a trade or business subject can regard the prizes of crypto-currenciess spil self-employment income by deducting all expenses associated with the virtual currency mining activities. So the person can pay self employment tax on income out of mining of virtual currencies.
Salary or Wages te Virtual Currencies
If any organization pays employees or workers te virtual currencies, IRS has clarified that the fair market value on the date of receipt by the employee shall be counted for tax withholding and legal purpose. So , employer and employee will have to obey with Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and vereiste be reported on Form W-2.