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10 Things You Should Know About Investing in Bitcoin and Taxes

Investing in Bitcoin and taxes are both complicated. Here's how to navigate it all without losing your mind.

Investing in Bitcoin is something that has made many people thousands, and sometimes even millions, of dollars. It's a tech-heavy endeavor that is both risky and rewarding at the same time. For many people, Bitcoin is known as the new criminal currency due to its link to the Russian election scandal, Silk Road, and, of course, the Dark Web.

Partially due to the links it has to illicit commerce, and partially due to the way that Bitcoin has exploded in both value and investors, the IRS has recently announced that it would expect to collect taxes on Bitcoin revenues.

For investors, this can be pretty intimidating. Here's what you should know about investing in Bitcoin and taxes that might be due on them.

First, yes, the IRS wants a share of your Bitcoin profits.

If there's one thing you will need to know, it's that you shouldn't mess with the IRS. The IRS has made it very clear that they want to get a share of the Bitcoin returns you've been getting. Not doing so is, now, in violation of tax law, and that can lead you to a huge problem or two.

The best thing to do is to file your taxes with your Bitcoin gains in mind.

Though you'd expect them to do otherwise, the IRS hasn't really explained the guidelines on Bitcoin taxation.

The biggest problem when trying to figure out what to know about investing in Bitcoin and taxes is the IRS guidelines themselves. The IRS isn't really totally clear about how to file taxes on the gains and losses that you have from Bitcoin investments.

However, there is a good rule of thumb you can use to file. Cryptocurrencies are treated like property, which means that you will need to file them as property.

You don't have to pay taxes on Bitcoin and other cryptocurrencies that you're just holding onto.

When it comes to investing in Bitcoin and taxes, one of the biggest misconceptions is that you need to give the IRS a portion of all your Bitcoins even when you're just holding onto them.

To file taxes, you have to do a taxable event. Taxable events include, but aren't limited to:

  • Trading cryptocurrencies. You are going to need to file any time you start trading cryptocurrencies. Selling Bitcoin is considered to be a form of income or using Ether to buy an altcoin both count under this category. These are considered to be capital gains and losses.
  • Mining Bitcoin. This is considered regular income equal to the value of Bitcoin during the time it was mined.
  • Using Bitcoins to buy goods. This is considered a long-term or short-term capital gain.
  • Air drops. These are taxed as regular income too.

Capital gains are going to be the most important aspect of filing taxes on Bitcoin.

Most of the taxes you'll pay on Bitcoin are due to the capital gains you have from investing in cryptocurrency. Capital gains can be taxed on long-term and short-term rates.

Long-term investors have reduced tax rates, with a maximum tax rate of 15 percent. Short-term investors will be taxed at the standard 23 percent on all capital gains.

The digital exchanges that allow you to buy cryptocurrencies aren't regulated by the IRS.

Most investment platforms will be monitored by the IRS and the SEC, among others. This requires meticulous record keeping, and often also requires them to send out 1099 forms to you as part of their service to you.

Cryptocurrency exchanges do not have this perk. At all. They aren't regulated, so all the record keeping and 1099 forms you will need to send out will be your responsibility.

This also means you need to calculate gains and losses.

The most difficult part of navigating the worlds of investing in Bitcoin and taxes is actually figuring out how much you owe. Since most platforms don't track gains and losses, you will be the one who has to track those statistics.

As you can imagine, this can get pretty rough.

Some exchanges are starting to roll out with gear to help reporting become an easier process.

Some cryptocurrency exchanges, such as Coinbase, have taken note of the IRS's new regulations. They have started to provide free 1099-K forms to private business accounts and investors who have large sums of money invested in cryptocurrency.

That being said, the gains and losses are still up to you to calculate.

Though the IRS has announced the new tax requirements, it appears that most investors still have yet to report on it.

It appears that investing in Bitcoin and taxes still don't seem to go together in the minds of most people. Though CreditKarma offers a cryptocurrency reporting option, only around 100 out of its thousands of users have used it to report gains and losses on their income.

So, while taxes are mandatory, it's looking like most people who invest in Bitcoin aren't reporting them.

Most tax pros agree that it's better to let a professional handle it.

Though a lot of incomes are easy to prepare taxes for, Bitcoin isn't one of them. This is fairly complicated, and it's remarkably easy to get tripped up. If you have a lot of income tied to Bitcoin and cryptocurrency investing, it's best to see a specialist.

A better way to deal with investing in Bitcoin and taxes surrounding them is to invest indirectly.

There are a lot of ways to invest in Bitcoin without owning it—and most of them are actually pretty easy to navigate. If you want to have an easier time during tax season, choose stocks related to Bitcoin to make your tax returns easier.

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