How and Why You Should Pay Taxes on Your Bitcoin Profits


Bitcoin prices are booming along with most other crypto currencies if you own or trade Bitcoin you're likely sitting on profits Today I'm going to talk about how and why you should pay taxes on your Bitcoin profits? Stay tuned! Hey everyone its Noel B

Lorenzana with Lorenzana Tax and Accounting Services I'm an Illinois Licensed Registered CPA Licensed Tax Preparer in all 50 states and Certified Tax Resolution Specialist Okay, so what is Bitcoin? If you don't already know Bitcoin is, it's a digital or virtual currency created in 2009 by the mysterious Satoshi Nakamoto It offers lower transaction fees and anonymity of transactions, and it's operated outside of government authority

Think of it as an innovative payment network and a new kind of money You can learn more about it at bitcoinorg So if you've been investing in Bitcoin or other crypto-currencies, pat yourself on the back because you've likely profited nicely In the United States the IRS – Internal Revenue Service – has issued guidance on virtual currencies so pay attention If you're thinking that the IRS will never find out about your Bitcoin transactions, after all the transactions are supposed to be anonymous and outside of the reach of government, right? Guess again

The IRS is actively investigating unreported transactions ie tax evasion, related to Bitcoin They have subpoenaed the records of Coinbase, the most popular and mainstream Bitcoin platform in the United States Heed my warning, pay your taxes Their investigation could eventually lead to you owing back taxes or penalties and even the seizure of your accounts

Bitcoin and taxes is a hugely complex subject, so I'm only going to cover some basic examples Let's say you bought one Bitcoin in 2015 for $200 Since then the prices have skyrocketed so now, It's 2017 and you sold your Bitcoin for $4,000 You now have a realized long-term gain of $3,800 Nice

The IRS treats Bitcoin as property like stock investments, and as such the long-term gains are taxed at 15% So in this example you would have a tax liability of $570 dollars This would be recorded on form 8949 on your personal tax return Now if you held the Bitcoin investment for less than a year, then the applicable tax rate would be at your highest ordinary income tax rate Which is as high as 39

6%, but for most people It's 25% or 28% That's easy enough Here's where it gets complicated Let's use the same example earlier, but now you use the one Bitcoin to pay for some new hardwood floors for your living room This is actually two transactions Disposing of the virtual currency and spending the virtual currency You will still have a $3,800 long-term capital gain, but now the recipient of the one Bitcoin has the responsibility to report the $4000 as income on their tax return If you're an active trader in Bitcoin don't expect a detailed 1099 listing your cost basis and gains and losses

It can be difficult, but it's important to keep good financial records the burden of proof is on you the taxpayer Can you donate Bitcoin and take the fair market value tax deduction? Yes you can, but in order to take the full fair market value of the Bitcoin as a charitable contribution, you must have held it for more than one year and keep in mind that gross income limitations apply You also want to give or transfer the Bitcoin directly to the charitable organization, otherwise it's not as favorable from a tax standpoint What about business transactions with Bitcoin? Business transactions in Bitcoin are subject to all the normal rules for business transactions like sales taxes, withholding and information reporting In other words, if you use Bitcoin to pay for goods or services you have two transactions; One is for the gain or loss on the sale of Bitcoin and the other is a transaction with paying for the goods or services If you use Bitcoing to pay your employees all the same rules apply

You need to record the disposition of the Bitcoin and all payroll related taxes, withholdings and deposits need to be done as usual 1099 information reporting is required as well That is when paying independent contractors in the course of business more than $600 in Bitcoin It's a reportable transaction by issuing a 1099 to the recipient at the end of the year Okay the last topic I want to cover is lost or stolen Bitcoins

It's unfortunate, but it happens In a virtual world, Hackers are Kings Lost or stolen bitcoins would generally fall under Section 165 of the tax code Casualty and theft losses Yes, you can't take a deduction for losses, but individual losses are subject to a $100 floor

They are only deductible to the extent there is a total loss for the year that exceeds ten percent of your adjusted gross income Don't even think about taking a loss deduction if you're not reporting your Bitcoin profits I hope that I've given you enough reasons why you should report your Bitcoin profits, but here's another one Often times you might need to produce a tax return for getting a loan on a home or for business The additional income from your Bitcoin profits may be essential in proving additional sources of income

In other words, verifiable income I see this happen from time to time It's just another added benefit of paying taxes on your Bitcoin profits The topic of Bitcoin and taxes is very complicated If you're a Bitcoin user I urge you to pay close attention

And don't think for a minute the IRS will never find out They may be playing catch-up with technology, but they are paying close attention In addition you can be subject to penalties for failure to comply with tax laws, information reporting penalties, tax evasion and tax fraud In closing, keep in mind that every Bitcoin or crypto-currency transaction is a taxable transaction Now, if you need help with a tax issue related to Bitcoin or other virtual currency, contact me

I'm well-versed on the subject I'm licensed in all 50 states I can help you My telephone number is (847) 780-6635 And my email addresses info@lorenzanatax

com Thank you so much for watching Please share, like and subscribe, so I can make more helpful videos If you have any questions or comments, please leave them below Thanks and take care You

About the Author Dancake

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