Bitcoin Taxes 101

Bitcoin, the world’s leading cryptocurrency has grown immensely in value and importance in the past year, and authorities have also taken notice of that. But naturally, it was impossible for bitcoin to be exempt from taxes for much longer.

Around the world, tax authorities are mostly on the same page when it comes to bitcoins. The Internal Revenue Service(IRS) and its counterparts from other countries think that Bitcoin should be considered an asset not a currency, as it is not issued by a central bank. But bitcoin taxation differs in each country.

First, some tax terms

Basis: The sum you paid to buy bitcoin (including fees).

Short-term gain: Realized gain on investments held for one year or less before selling it.

Long-term gain: Realized gain on investments held for longer than one year before selling it.

The United States

As the IRS treats bitcoin as an asset, this means that bitcoin transactions have to be reported to the IRS for tax purposes. Thus the US taxpayer has to record all buying, selling, investing, or use of bitcoin. If you use bitcoins for the simplest of transactions that will incur a capital tax gain (either short term or long term, depending on how long you’ve been holding the bitcoins).

Short-term gains are taxed like regular income based on a tax calc, the rate being equal to your federal income tax bracket. Long-term gains are taxed at a lower rate (still according to your income level), which are 0% for people in 10%-15% ordinary income tax rate bracket, 15% for people in the 25%-35% tax bracket, and 20% for those in the 39.6% tax bracket.

People that mine bitcoin and produce bitcoins, have to include the fair market value of the mined bitcoin to his annual gross income.

Wages paid in bitcoin are subject to federal tax withholding and other employment-related contributions, being taxed on the basis of their fair market value on the date of the receipt.

Bitcoin payments made during a trade, such as rent, annuities, premiums are also to be reported for fiscal purposes.

The European Union

The European court of Justice ruled out the Bitcoin transactions as being exempt from VAT (value added tax) „under the provision concerning transactions relating to currency, bank notes and coins used as legal tender.” Therefore, according to the ECJ, Bitcoin is a currency, not an asset.

The taxing of bitcoin differs from country to country, some subjecting the cryptocurrency to capital gains or income tax, some having no taxes at all.

The United Kingdom

The UK treats bitcoin as a foreign currency. Thus tax rules applying to currency gains and losses applies to Bitcoin transactions. But the UK tax authority is rather vague when it comes to tax enforcement measures, with some bitcoin transaction that constitute „speculative transactions” not being subjected to any taxes.

Japan

Japan officially recognized bitcoin as a payment method. The sale of bitcoin is exempt from consumption tax, virtual currencies being treated as „asset-like values”. Thus, any money gained from trading is considered business income and is treated accordingly for income and capital gains purposes.

Australia

Transactions involving bitcoin or other cryptocurrencies are considered barter arrangements. The Australian taxa authorities regard bitcoin as an asset for capital gain purposes. Australian businesses conducting Bitcoin transactions should properly document, record, and date the transactions. Businesses that receive payments in Bitcoin have to declare their value ordinary income.

However, bitcoin transactions for personal use are exempted from taxation in the following cases:

-if bitcoin was used as payment for goods and services for personal use;

-the value of the bitcoin transacted is lower than AUD 10.000.

Bitcoin mining and exchange for business purposes are considered to be stock trading and taxed accordingly.

Conclusion

The taxation of bitcoin differs greatly depending on each country’s jurisdiction. Some consider it to be a currency, others see it as a property or asset. Regardless of your country or their jurisdiction, don’t forget to pay your taxes.