Step 4: Enter your state’s tax rate. Part 2: For each Bitcoin sale within a tax year. Step 1: Enter the purchase date and purchase price. The purchase date can be any time up to December 31st of the tax year selected. Step 2: Enter the sale date and sale price. Make sure the sale date is within the tax . Apr 10, · The U.S. state of Ohio is poised to become the first state to accept Bitcoin (BTC) as a tax payment. The move initially applies only to businesses, with plans to extend the offering to individual taxpayers in the future. Ohio-based businesses are able to register to pay all of their taxes in the leading cryptocurrency. The IRS further indicates that Bitcoin is treated as property and is subject to general tax principles. You must include in your gross income the fair market value of the currency in U.S. dollars if you're paid in bitcoins for goods or services. Transactions using virtual currency should be reported in U.S. dollars. 2 .
State tax bitcoinThe Tax Implications of Investing in Bitcoin
However, other states have taken action, with some states somewhat hostile towards Bitcoin and other altcoins , while other states are more welcoming.
Here are the top 10 Bitcoin-friendly states. Category One states are those that have created laws with the effect that digital currency is excluded from money transmission statutes. Montana might also fall under Category One, even though it did not amend its money transmitter statute to exclude cryptocurrency, for the simple fact that Montana is now the only state in the Union that does not have a money transmission law.
Therefore, there is no possibility of including cryptocurrency in money transmission regulations in Montana at the current time. Category Two states are still relatively friendly towards virtual currency but are a step-down from Category One. Category Two states have not enacted laws stating that money transmission does not apply to virtual currency, but rather various state agencies have issued rulings or regulations to the same effect.
The regulations should be followed just like laws, but regulation is weaker than a law. Illinois is a Category Two state because its Department of Financial and Professional Regulation issued guidance to the effect that virtual currency does not fall under the definition of money and thus does not fall under the money transmission law as well.
Category Three states are distinctly less friendly to cryptocurrency. New York state through its BitLicense would also fall into this category. Category Four states have implemented laws that explicitly state that virtual currencies fall under the guidance of money transmission legislation. As a result, cryptocurrency is subject to the Act and must obtain a license from the state. The majority of U. This includes states that issue no guidance and do not currently regulate such as California and Colorado.
It also includes states that issue informal guidance when contacted and decide on a case by case basis whether state regulations and money transmission regulations apply. For example, a state such as South Dakota, may state that cryptocurrency is money, but ask to see a business plan for a final decision. If and when a miner has to pay taxes, we clarify in the article Taxes on Mining income. The financial outcome of those transactions is subject to the capital gains regime stated at the Capital Gains Section.
As such, general tax principles applicable to property transactions apply to transactions involving the sale or exchange of cryptocurrency. For example, if you exchange Bitcoin for Ether, you will need to tax the capital gain or loss resulting from this transaction. That means if you hold crypto for more than a year without selling or exchanging it , you will pay long-term capital gains when you sell or exchange. You will need to calculate short-term and long-term capital gains and provide the details in Form and Form With the CryptoTax application, the capital gains will be automatically calculated and you will receive the filled forms.
The taxpayer must also identify whether they are a hobby or self-employed business miner for tax reporting purposes. If the taxpayer is a hobby miner, the income received by the taxpayer as it relates to cryptocurrency mining will be treated as ordinary income. Expenses related to the mining business activity including but not limited to the depreciation of mining equipment, electricity, and hardware may be deducted for tax purposes. Business miners are also subject to self-employment tax at a rate of In general, the IRS states a hobby activity is done mainly for recreation or pleasure.
Please note one factor alone is decisive and all factors must be considered:. To report business income from mining, the taxpayer will report the amount received as self-employment income and any related mining business expenses on Schedule C and Form Additionally, the self-employment tax beared by the taxpayer will be calculated and reported on Schedule SE and Form CryptoTax aims to provide the best solution for reporting taxes on cryptos.
We work together with a Big 4 accounting firm to ensure full legal compliance of our tax reports. You do not need to deal with spreadsheets anymore and with CryptoTax you have an application that will save you a lot of time.
It will apply certified tax logic to all your transactions, calculate taxable income and fill all the forms automatically for you. You can use CryptoTax application, which is much more than just a tax calculator. It makes sure that all your transactions are considered properly according to the US federal tax law and fills out the IRS forms for you.
The best thing is that you can use CryptoTax for free within the early access! The information was completed to the best of our knowledge and does not claim either correctness or accuracy. For detailed information on crypto regulations, we recommend contacting a certified legal advisor in the respective country.
If any questions occur, feel free to contact us on our social media channels. We have sent you a verification email. Please check your email and click on the link to activate your CryptoTax account. Skip to content. Bitcoin and Taxes. Table of contents. Tax Treatment of Bitcoin Bitcoin, just like Ethereum and other cryptocurrencies, is treated as property for tax purposes. Exchange or Sale of Bitcoin Just like with any other cryptocurrency, the sale and exchange of Bitcoin is a taxable event , and, in the US, capital gains tax applies to this.
To determine whether a capital gain or loss was realized in the event of a sale, the difference between the fair market value of Bitcoin at the sale and the adjusted basis is calculated. As with any other asset, the terms of cost basis and adjusted basis are important for proper tax treatment.
The cost basis is the amount of money paid for Bitcoin by the taxpayer. Any additional costs, e. Both the cost basis and the adjusted basis make up the acquisition cost. In the case of buying Bitcoin, the acquisition cost consists of the price of the Bitcoin at the time of purchase and possible fees, e. In order to calculate the gain on the sale, the selling price less acquisition costs and income-related expenses must be taken into account.
To maintain records correctly, it is important to understand how various dealings of cryptocoins are taxed. Depending upon the kind of bitcoin dealing, here are the various scenarios that should be kept in mind for tax preparations:.
If bitcoins are received as payment for providing any goods or services, the holding period does not matter. If bitcoins are received from mining activity, it is treated as ordinary income. If cryptocoins are received from a hard fork exercise, or through other activities like an airdrop , it is treated as ordinary income. If held for less than a year, the net receipts are treated as ordinary income which may be subject to additional state income tax.
If the holding period is for more than a year, it is treated as capital gains and may attract an additional 3. However, care should be taken that only cryptocoin donations made to eligible charities qualify for such deductions. Selling the tokens and then donating the dollar amount will not reduce your bitcoin tax burden.
Additionally, the deductions are available for individuals who itemize their tax returns. Investing in cryptocurrencies and other Initial Coin Offerings "ICOs" is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions.
Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns no cryptocurrencies. District Court for the Northern District of California. Coinbase, Inc, Case No. Internal Revenue Service. Accessed Dec.