In which year did the United States subject Bitcoin to capital gain tax ?

In which year did the United States subject Bitcoin to capital gain tax?

In 2014, the IRS issued a notice declaring that for tax purposes, cryptocurrency is property, not currency.

Bitcoin may be a virtual currency that uses a cryptographic encryption system to facilitate secure transfers and storage. Unlike a fiat currency, bitcoin isn't printed by a financial institution, neither is it backed by any.

Bitcoins are generated by what's called mining—a process wherein high-powered computers, on a distributed network, use an open-source mathematical formula to supply bitcoins

It takes real high-tech hardware and hours or maybe days to mine bitcoins. 

One can either mine bitcoins or buy them from someone by paying cash, employing a MasterCard, or maybe a PayPal account. Bitcoins are often used like fiat world currency to shop for goods and services.

In the beginning, bitcoin's attractiveness was attributed partly to the very fact that it wasn't regulated and will be utilized in transactions to avoid tax obligations. The virtual nature of bitcoin and its universality also make it harder to keep track of in cross-country transactions.

Also, government authorities around the world soon realized that bitcoin attracted black marketers who could make illegal deals. Naturally, bitcoin couldn't escape the tax authorities' radars for long.

Bitcoins & Taxation

Around the world, tax authorities have tried to bring forth regulations on bitcoins.9 The U.S. Internal Revenue Service (IRS) and its counterparts from other countries are totally on an equivalent page when it involves the treatment of bitcoins.

The IRS has said that the bitcoin should be treated as an asset or an intangible property and not a currency because it isn't issued by a financial institution. Bitcoin's treatment as an asset makes the tax implication clear. 

The agency said in July 2019 that it had been sending warning letters to quite 10,000 taxpayers it suspects "potentially did not report income and pay the resulting tax from virtual currency transactions or didn't report their transactions properly." It warned that incorrect reporting of income may result in penalties, interest, or maybe prosecution.

 The IRS has made it mandatory to report bitcoin transactions of all types, regardless of how small in value. Thus, every U.S. taxpayer is required to stay a record of all buying, selling of, investing in, or using bitcoins to buy goods or services (which the IRS considers bartering).

Because bitcoins are currently being treated as assets, if you employ bitcoins for easy transactions, like window shopping at a supermarket, you'll incur a capital gains tax (either long-term or short-term counting on how long you held the bitcoins). When it comes to bitcoins, the following are different transactions that will lead to taxes:

1 : Selling bitcoins, mined personally, to a third party

2 : Selling bitcoins, bought from someone to a 3rd party

3 : Using bitcoins, which one may have mined, to shop for goods or services

4 : Using bitcoins, bought from someone, to shop for goods or services

Scenarios one and three entail mining bitcoins, using personal resources, and selling them to someone for cash or equivalent value in goods and services. The value received from abandoning the bitcoins is taxed as personal or business income after deducting any expenses incurred within the process of mining.

Such expenses may include the value of electricity or the pc hardware utilized in the mining of bitcoins. Thus, if able to mine 10 bitcoins and sell them for $250 each, you have to report the $2,500 as taxable income before any deductible expenses.

Scenarios two and 4 are more like investments in an asset. Let’s say bitcoins were bought for $200 each, and one bitcoin was given up in exchange for $300 or the same value in goods. The investor has gained $100 on one bitcoin over the holding period and can attract capital gains tax (long-term if held for quite one year) on the surplus 

Short-Term and Long-Term Capital Gains

If bitcoins are held for less than a year before selling or exchanging, a short-term capital gains tax is applied, which is equal to the ordinary income tax rate for the individual. However, if the bitcoins were held for quite a year, long-term capital gains tax rates are applied.

In the U.S., long-term capital gains tax rates are 0% for people with taxable incomes but $78,750, 15% for tax filers with taxable incomes between $78,750 and $434,550 ($488,850 for married couples filing jointly and widow(er)s, $244,425 for married couples filing separately, and $461,700 for heads of household), and 20% for those with taxable incomes that exceed the 15% threshold. 

Thus, individuals pay taxes at a rate less than the standard tax rate if they need to hold the bitcoins for quite a year. However, this also limits the tax deductions on long-term capital losses one can claim. Capital losses are limited to total capital gains made within the year plus up to $3,000 of ordinary income

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