Paying taxes is not a great topic to talk about, but it is tax season. Let’s assume that you are not in one of the many countries that don't have any real regulations or policy regarding Bitcoin ownership and value. If are living in a tax-centric locale like one of the biggest Bitcoin markets, the United States, how do you proceed? Here is a Bitcoin tax obligation overview for the American Bitcoiner. (Please consult professional tax advice before actually paying taxes.)
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There is some good news, so let’s get to that. If you are single, and only make money in Bitcoin, you are not liable for a federal tax obligation until you make at least $9350 for 2015, according to Investopedia and the IRS. You may be required to file federally, regardless of income, if you file as a self-employed individual, making over $400 a year. People below a certain annual income are not required to pay federal income tax, and even filing is not necessary below these thresholds.
The taxes start if you pass this minimum threshold. Let’s say you made $10k in USD from your Bitcoin services, or made $8k from a part-time job, but made another $2k in Bitcoin, then you will need to file a federal return. The Bitcoin income must declare and be rendered thusly.
According to Notice 2014–21, the U.S. Tax Code’s update for 2014, labeled “IRS Virtual Currency Guidance,” If you are an employer paying with Bitcoin, you must report employee earnings to the IRS on W-2 forms. You must convert the Bitcoin value to U.S. dollars as of the date each payment is made and keep careful records. Wages paid in virtual currency are subject to withholding to the same extent as dollar wages.
If you are an employee paid in Bitcoin and filing federally, you must report your total W-2 wages in dollars, even if earned as Bitcoin. Self-employed individuals with Bitcoin gains or losses from sales transactions also must convert the virtual currency to dollars as of the day earned, and report the figures on their tax returns. Use a price chart that records daily Bitcoin price, like the one from Coindesk, to get these values. There is also tax payment assistance for Bitcoiners like libratax.com, that can help with these potentially complicated details.
If you hold Bitcoins as an asset, you must treat them as property for tax purposes. Like stocks or bonds, any gain or loss from the sale or exchange of the asset is taxed as a capital gain or loss. Otherwise, the investor realizes ordinary gain or loss on an exchange. If you do not sell or exchange them for another currency or commodity, you’ll be fine.
If you are a Bitcoin “miner,” here’s how it works. If the taxpayer successfully “mines” Bitcoins and has earnings, in Bitcoins or otherwise, they must include it in his gross income in determining the fair market dollar value of the virtual currency as of the day he received it. If a bitcoin miner is self-employed, his or her gross earnings minus allowable tax deductions are also subject to the self-employment tax.