The prominence of Bitcoin has triggered mixed reactions in the financial world. Some parts have reasonably well-defined bitcoin tax reporting regulations, which has lead people to get involved in the world of cryptocurrency in a big way. They are becoming increasingly curious and acutely aware of the potential of cryptocurrencies and Bitcoin in particular, on the modern economy.
However, people in countries with ill-formed Bitcoin tax reporting regulations are understandably skeptical about the cryptocurrencies and their potential impact on the financial world. This is why Bitcoin is very popular in countries like Germany due to how easy it is to buy bitcoin with paypal or another centralized payment method.
Considering the crypto world is here to stay, it would do you some good to educate yourself on the fundamentals of Bitcoin (and cryptocurrencies in general), its history, Bitcoin tax reporting, and more.
What is Bitcoin?
Bitcoin is known to be the first cryptocurrency to grace the financial world.
It is a digital exchange. Bitcoin was developed by a pseudonymous individual or a group under the name of Satoshi Nakamoto, whose real identity is unknown.
Bitcoin operates on a decentralized authority, unlike conventional FIAT currencies like the U.S Dollar (USD). Bitcoin was built on Blockchain technology.
No physical coins are used. There are only balances that are maintained on a public ledger, which, along with all Bitcoin transactions, are verified an enormous amount of computing power. A vital point to keep in mind is that Governments or banks do not back cryptocurrencies.
Fundamental Bitcoin Characteristics
Bitcoin and Bitcoin tax reporting becomes much simpler to understand once you know their essential characteristics.
Bitcoin transactions are not reversible
That’s right. All Bitcoin transactions are final. Owing to Bitcoin’s Peer to Peer (P2P) network and the absence of intermediaries, all Bitcoin transactions are final. You must ensure you verify your transaction before you carry it out.
No Paperwork
Bitcoin transactions require no paperwork from your end.
You do not need an ID card, passport, or proof of address that conventional banks would generally ask you to submit before opening an account. You only need to download a Bitcoin Wallet program and generate a Bitcoin Address.
Cost-effective Transaction Method
Bitcoins boast a cost-effective method of transactions thanks to the peer-to-peer (P2P) network they employ. The P2P network sends and receives information between computers without using intermediary bodies. Traditional banking systems, however, make use of intermediaries and have transaction processing charges.
Quick Transactions
As mentioned, there are no intermediaries in a P2P network, which means that Bitcoins allow transactions to take place in a short amount of time.
When do you have to do Bitcoin Tax Reporting?
Bitcoin other cryptocurrencies are treated as property as per the federal tax law. This means the tax laws on assets like property apply to cryptocurrencies, as well.
The Bitcoin tax that you will have to report depends on how long you hold your Bitcoin. There are mainly two types of capital gains tax – long term and short term.
You will have to report short-term capital gains tax if you sell your Bitcoin less than a year from the time of purchase.
However, if you sell Bitcoin post one year from the time of purchase, you will be liable to a long term capital gains tax. You could be liable to 0%, 15%, or 20% Bitcoin tax, entirely depending on your taxable income and the status of your filing.
That being said, it is a good idea to hold on to your Bitcoins for as long as possible, preferably for over a year since the long-term capital gains tax is lower than the short-term capital gains tax.
Your Bitcoin tax reporting has to be done on the 8949 form. The following situations will require you to report your Bitcoin tax.
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When you sell your Bitcoins for conventional FIAT currencies such as the USD
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When you make use of your Bitcoins to purchase goods and pay for services
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When you swap your Bitcoins for other cryptocurrencies
You do not have to pay capital gains tax:
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When you donate your Bitcoins to charities and organizations that are exempt from tax
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When you transfer your Bitcoins amongst your wallets
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When you buy your Bitcoins using a FIAT currency like USD.
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When you gift small amounts of Bitcoin that do not cross $15k
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When you lend your Bitcoins to someone
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When you receive your Bitcoins via Bitcoin mining or hard forks
The Solution to Bitcoin Tax Reporting – Bitcoin Tax Calculators
Everyone knows by now that Bitcoin Tax calculators are an invaluable tool for a crypto trader. As daunting a task as Bitcoin Tax Reporting is, it can be made simple with the help of a crypto tax calculator. Here are a few useful tax calculators:
ZenLedger
ZenLedger is a Bitcoin tax reporting software worth your time. Its design and user-friendly interface make Bitcoin tax reporting a total breeze.
ZenLedger allows you to create a Bitcoin tax report in no time using your Bitcoin details. It has tied up with TurboTax to make it easy for you to import your Bitcoin Tax reports and auto-fill tax forms.
ClearTax
ClearTax is a useful crypto tax software for Bitcoin tax reporting.
The platform requires you to provide basic details that include how you acquired your Bitcoins, the value of the Bitcoin at which it was purchased, the selling price of the Bitcoin, and for how long the Bitcoin was held before the transaction.
CoinTracker
CoinTracker is known to have a user-friendly platform that helps you create a Bitcoin tax report for your transactions. In addition to this, it auto-fills your tax forms, thereby making your tax reporting simple.
You should have no problem opening an account on CoinTracker using your email address. Once that is done, sign in, you will be redirected to a page where you can begin your Bitcoin tax reporting and calculations. Be sure to follow these steps to create a tax report for your Bitcoin transactions.
Step 1: Import the data on your transactions from your exchanges and wallets.
Step 2: Review your transactions.
Step 3: Download your Bitcoin tax report and look at the auto-filled tax forms.
myCryptoTaxCalculator
myCryptoTaxCalculator is a sound solution if you wish to simplify your Bitcoin tax reporting. It is used to calculate taxes on your Bitcoin transactions.
myCryptoTaxCalculator may be used to help you fill out the required information in the tax forms. You can use myCryptoTaxCalculator to generate a Bitcoin tax report for you in the following three steps:
Step 1: Import all your data and history from your exchanges and Bitcoin Wallets
Step 2: Review your purchases and sales
Step 3: Generate a Bitcoin tax report for all your transactions.
CryptoTrader.tax
CryptoTrader.tax is a competent Bitcoin tax reporting software developed to make tax reporting easy.
Instead of wasting hours of your time filling up spreadsheets, hoping to get through it without mistakes, use this crypto tax software. It allows its crypto traders to import exchanges and wallets directly onto the platform without issues. The software then processes this data and runs it. You can receive a Bitcoin tax report at the click of a button.
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