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Cryptocurrency: Understanding the Tax Process applying to Bitcoin

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Taxing cryptocurrencies is proving to be a challenge for both authorities and taxpayers. The tax obligation and process are still a little hazy to most people in the crypto space.  Bitcoin and other cryptocurrencies gained a lot of interest for lack of any regulatory obligations. Many love the digital currencies since no government or banking system has authority over a transaction. Not having to pay taxes attracts more individuals to the crypto space.

The lack of regulations for cryptocurrencies caused increased activities in the black market. This forces governments and key players in financial industries to take action.  The creation of tax obligations in the market space helped bring order and responsibility.

Similar tax laws in different financial markets

Since Bitcoin is universally applicable, most financial authorities create laws that are similar to that of their counterparts. This means the laws and guidelines provided by the Internal Revenue Service (IRS) in the United States are somewhat similar to rules in Europe, Africa, and Asia. However, it is essential to research the tax laws in a particular country before engaging in any crypto activity.

The IRS treats Bitcoin and other cryptocurrencies as assets. The IRS claims that Bitcoin and other digital currencies cannot be official currencies since no central bank issues them. The crypto definition under the tax laws provide insight on how to handle tax obligations.

Crypto owner’s obligations

Since tax institutions regard cryptocurrencies are assets, crypto owners have to report all relevant transactions whether they are big or small.

Additionally, crypto owners have to keep a record of all their transactions. This include, all sales, investments, purchases and crypto payments for goods and services.

Taxation of mined cryptocurrencies

Miners must report their cryptocurrency transactions to the IRS. Selling Bitcoins and using Bitcoins that you have mined personally have attached tax obligations.

The IRS taxes the value of the mined Bitcoins and other currencies as either personal or business income. For instance, if a person mines five Bitcoins and sells those for $100 each, they need to report $500 as taxable income before deducting any expenses.

Taxation of bought cryptocurrencies

The IRS treats purchased cryptocurrencies like Bitcoins, as an investment in assets. The profits earned from such transactions are subject to a capital gains tax.

There are short-term capital gains taxes and long-term capital gains taxes.  Short-term capital gains apply to cryptocurrencies held for less than a year before a transaction.

Authorities treat these taxes at ordinary income taxable rates while those that take more than a year are subject to long-term capital gains tax.


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