Bitcoin was first introduced to the world in 2009, with a price tag of 10,000 Bitcoin for two Papa John’s pizzas, which is still astounding today. Many buyers were fortunate enough to have the foresight to purchase the asset, which has continued to climb steadily since its launch, although with some uncertainty.
However, if you’re one of them, be aware that depending on your tax reporting status and salary, you might end up paying a significant amount of money in taxes on your Bitcoin earnings.
The extra revenue you earn from Bitcoin could drive you into a higher tax bracket, equivalent to returns on equity investments.
The IRS is vigorously pursuing cryptocurrency tax evaders by requesting user information from cryptocurrency exchanges via “John Doe” summons.
“The John Doe summons is a measure to help the IRS to expose those who are failing to properly record their virtual currency transactions,” says IRS Commissioner Chuck Rettig.
Exchanges are legally obliged to disclose submitted user records to the IRS until a John Doe summons is released.
For unprepared clients, the mixture of zealous policymakers and the IRS becoming serious about raising taxes on cryptocurrency profits spells danger.
According to the IRS, the vast majority of cryptocurrency owners are yet to reveal their shares to the government. […]… And, as they bask in their newfound fortune, a perfect storm of “Mo Problems” is brewing, which must be solved before it consumes them.
According to this tax policy the IRS is requesting that Circle, a Boston-based financial technology firm that facilitates the exchange in different forms of cryptocurrencies, generate account registry information, account activity reports, and other materials for customers who transacted at least $20,000 in every year between 2016 and 2020.
The IRS sent a warrant to Circle as part of a continuing audit by the Internal Revenue Service to ensure that all types of blockchain users are registering and paying their tax obligations, according to court documents.
It is taxable to sell Bitcoin. The additional profits you earn from Bitcoin, including returns on equity investments, can drive you into a higher tax bracket. Although, before you worry, here are a few things to think about when estimating the effect of your Bitcoin gains on your tax return. Bitcoin is treated as property rather than money for federal tax purposes. This means that all earnings will be subject to capital gains payments, whether they be short-term or long-term.
That means Bitcoin is taxed at the same rate as stocks and is subject to capital gains taxes.
The IRS typically sends tax notices to people under scrutiny after granting summonses to crypto exchanges. After working with a competent tax advisor or using cryptocurrency tax tools, taxpayers can consider amending past filings if any cryptocurrency transfers were missed or misreported.
As it is the most sensible thing to do in these cases, it is always recommended to get tax advice from lawyers and accountants.