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Tax Implications of your Bitcoin Transactions


Tax Implications of your Bitcoin Transactions

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Bitcoin (BTC) is considered by many to be the new digital currency on the block. But it’s neither brand new nor is it really a true currency (although it can be utilized that way). It’s been around for about 14 years where it began at close to $0.0009 per Bitcoin to a high last year of approximately $69,000 per BTC.

Not a bad return if you remained invested for that entire fourteen year period. In fact, you’d probably be a multi-millionaire or even a billionaire if you dollar cost averaged a certain amount of BTC everyday or every week or every month, and most importantly didn’t sell, even during the roughest of Bear markets like the one the world is experiencing right now.

If you are an individual who trades Bitcoin on a daily basis, it’s imperative that you outsource your accounting since by law, every BTC transaction is a taxable event. Says District Advisory, a   CPA Services Firm in Washington, DC, your accounting and finance professional should do more for your than organize your financial books. They should come up with ideas that can that impact your organizations profitability and it’s operations, even that operation consists of one person trading BTC from a home office.

The fact is, the tax implications of BTC (and other cryptos) can be difficult to navigate since there’s so little regulation surrounding them.

According to a new financial report, here’s a look at what exactly BTC is along with the implications of your Bitcoin transactions.

BTC: the Original Crypto

Back in late 2008, an individual or individuals named Satoshi Nakomoto published the original BTC whitepaper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” and since then, the global economy has never been the same. Creating at the apex of the U.S. Mortgage Crisis of 2008, BTC has become the most widely recognized and respected digital currency.

Hundreds if not thousands of other projects (sometimes referred to as “s#$t coins”) have been created “in the image of its transformative technology.” BTC is mined, distributed, traded, and stored on a decentralized ledger separate from the banking system known as the blockchain.

Some might argue that BTC wasn’t the first cryptocurrency, but for certain it was the first to become entirely mainstream with its decentralized approach and its “proof-of-work.”

BTC is Stored in Your Digital Wallet and/or Vaults

Want to be your own bank? While banks hold your money in a custodial account, BTC is stored inside a cryptocurrency wallet or what’s also known as a digital wallet. You are given a private key that acts like a password that communicates with the blockchain. Your wallet will allow you to monitor your BTC balance plus receiver and/or send coins. 

Hold the BTC Funds Yourself or Use a Custodian

Say the experts, two different types of digital wallets presently exist: non-custodial and custodial. The major difference between both is that custodial wallets come from third party services that will hold your private keys and also provide support services if required. These are exchanges such as Coinbase (the most widely known). They allow you to sell, buy, and store your BTC almost like a traditional bank.  

On the other end of the spectrum is the non-custodial wallet. This is completely user controlled and decentralized. It means no organization, government, or individual can get their hands on your BTC since they don’t have access to the private keys.

Think of the non-custodial wallet much like the personal wallet you keep your cash in. But be warned, you can lose your personal BTC key if its not written down and stored somewhere just as easily as you can lose your wallet in a crowded venue.

All Bitcoin Transactions are Transparent and Public

Maybe certain political pundits will claim that BTC is for laundering money. But nothing could be further from reality. That’s because every single BTC transaction is publicly viewable on the blockchain.

In truth, the entire idea of the blockchain is to utilize it as a public ledger so that any transaction no matter how small or large can be made publicly viewable.

Every BTC Transaction Comes with a Fee and is a Taxable Event

Just because your BTC is private and decentralized in nature, doesn’t mean the government isn’t going to find a way to get their share of the profits. Every time you make a BTC transaction you need to account for the “value transfer” plus the transaction fee.  

The transaction fee is what you pay to the blockchain network to make the transaction take place. In other words, buying and selling. Whenever you make a BTC transaction, there will be a fee involved and it can depend on the volume inside the exchange network at that particular time.

If you sell your BTC, there will not only be a fee, but your will also owe a certain amount of tax to both the state and the federal government. This is why it’s important to work closely with an accountant if you intend to quit your day job and become full-time BTC (and crypto) trader—an occupation that can be very lucrative in both bear and bull markets.