Bitcoin Tax Time, Who Really Owns That Crypto Anyway?
The Bitcoin cryptocurrency was invented by a group under the name Satoshi Nakamoto and released in 2009. Even though the transactions are peer-to-peer, among users directly without an intermediary, they are verified by a network that records them in a public distributed ledger called Blockchain.
In 2014, the Internal Revenue Service (IRS) issued a guidance to taxpayers where it marked virtual currency, also known as cryptocurrency, as a capital asset or property for federal income tax purposes. If you own crypto, Bitcoin tax information is important when filing your taxes.
The IRS made this decision because the crypto asset could be convertible into liquid money. Therefore, the capital gains rule apply for gains or losses. If you are a stock owner, you might be familiar with the process.
Basics of Bitcoin Tax
How do you calculate your asset gains?
From the time you gain the crypto asset to a taxable event like a sale or disposition, you must determine how much the basis of cost has gone up or down. The base cost or basis is the amount you originally paid for the assets.
A sale includes purchases of good or services like the trading for money or another cryptocurrency. The transfer of a crypto to another does not qualify as a tax-free 1031 exchange in the current Bitcoin tax code.
Exceptions to the Bitcoin Tax
Are you holding crypto for someone else? Well, Federal Income Tax Liability is based on ownership of local law and this can be difficult to understand. The person who has to pay the Bitcoin tax should be the one in control over the benefits of the capital property but this raises questions when the assets might be held in a trust.
For example, bank accounts. There may be an owner but the money might be held for someone else like underage children. The answer is not always 100% clear. Regardless of the person’s right to the funds under the prevailing local law, the Federal Income Tax Liability is before the law of prevailing Foreign Jurisdiction.
Usually, the IRS and the courts have to look beyond the Tax Code and local law to figure out who is the beneficial owner. Experts often explain there are exceptions.
If someone is holding a property title as an agent then he/she acts as the owner, they should not be taxed because they have no control or beneficial right to the account. With a joint account, the principal should be taxed and not the nominal co-signer.
Tax Court defined beneficial ownership as the ”freedom to dispose of the accounts’ funds at will”. Courts weigh factors such as which the party enjoys the economic benefit of the property, which party has possession and control; and the intent of the parties.
Summary of Bitcoin Tax in the US
If you are in the hold of an asset for over one year before a taxable event, it’s considered a long-term gain or loss, while if you hold it for one year or less before a taxable event, it’s considered a short-term gain or loss.
Capital gains rates can be favorable to taxpayers. For 2017 (the return that you’ll file when tax season opens in January 2018), capital gains rates for long-term gains range from 0% to 20%. Short-term capital gains are taxed as ordinary income, which means your marginal tax rate will apply to your short-term gains.
Other aspects to consider: giving cryptocurrency as a gift is not a taxable event, buying crypto with USD is not a taxable event and neither is a wallet to wallet transfer.
During Bitcoin tax season, you’ll report your realized gains and losses on a Schedule D, and then transfer the results to the reconciliation page on your federal form 1040. You don’t file a Schedule D if you have none realized gains or losses: even if the value changes. If there’s no sale or disposition, there’s nothing to report.