Determining your tax liability after engaging in a transaction using Bitcoin can be extremely complicated. It is important to note that the Internal Revenue Service has classified bitcoin and similar virtual currencies as property and not currency. This means the reporting requirements for bitcoin may be more tedious than you would expect. If you or a family member require assistance filing taxes on bitcoin transactions, you should consult with an experienced Roseville Bitcoin tax accountant today. At Cook CPA Group, our team of accountants is prepared to help you create a tax strategy that is catered to your needs. We recognize the complex tax reporting requirements for bitcoin, and we can help you streamline the process. Cook CPA Group is here to explain the tax rate for bitcoin in California.
How Does Bitcoin Work?
Bitcoin is a form of cryptocurrency that was created in 2009 by an unknown person or organization. It can be used to engage in worldwide transactions without the need for an intermediary. This means that a bitcoin owner can use their currency to engage in transactions with any person they choose without the need for a central bank.
If you were ever told that it is possible to hide your Bitcoin transactions from the IRS, that financial advice can land you in serious trouble, every bitcoin transaction is a taxable event. Whenever a bitcoin transaction occurs, it is recorded in the blockchain. The blockchain is a shared public ledger that keeps track of transactions on Bitcoin’s network. This network verifies a bitcoin owner’s balance and ensures a person owns the shares of bitcoin they use.
Unlike other forms of currency, Bitcoin is not backed by gold or other forms of rare metal. Instead, the value of Bitcoin can be explained by the limited amount of the currency that is available. Whenever a transaction is recorded, it changes the value of Bitcoin between the wallets involved in the transaction.
To learn more about how Bitcoin works, you should continue reading and consult with an experienced California certified public accountant.
Tax Consequences for Bitcoin Transactions
In 2014, the IRS published Notice 2014-21, which states that all virtual currency will be treated as property for federal tax purposes. This means that tax reporting requirements that typically apply to property transactions would now apply to Bitcoin and other cryptocurrency transactions.
If you accepted Bitcoin as payment for goods or services, this must be included when calculating your gross income. Specifically, the fair market value of the Bitcoin at the time of the transaction must be recorded and converted into U.S. dollars.
When engaging in a Bitcoin transaction, there are various factors to consider. For example, you must make a note of when you acquired the Bitcoin, how long you owned the Bitcoin, and when you engaged in a transaction that disposed of some or all of your Bitcoin holding.
To determine your tax rate for Bitcoin you disposed of; you should consider the following factors:
- The income you earned when disposing of Bitcoin
- The value earned from the difference in dollar value from the purchase and selling price of a transaction
- Whether the Bitcoin was held for a short-term period or a long-term period
The tax rate for your Bitcoin transaction will change depending on different factors. For example, if you made a Bitcoin purchase equal to $10,000 and you later sold that Bitcoin for $20,000, this is a $10,000 gain. If you held the Bitcoin for a year or less before selling it, this would be a short-term gain. Short-term gains are considered ordinary income and will be taxed depending on your tax bracket.
If you possessed the Bitcoin for over a year, this is a long-term gain. Long-term gains are taxed at different percentages depending on your income. This means you can be taxed from zero percent to twenty percent according to your income.
Reporting income from Bitcoin is accomplished by using Schedule D and IRS Form 8949 or Form 4797. Before filing with the IRS, you should ensure that you have accurately documented your Bitcoin transactions. The IRS is beginning to take the reporting of Bitcoin transactions very seriously. If they believe that you were knowingly attempting to hide income, you may incur a large tax bill. Our accounting firm is here to ensure that you stay on good terms with the IRS.
Work with Our Sacramento Tax Planning Accountants Today to Address Your Bitcoin Transactions
If you require assistance calculating the tax rate for your bitcoin transactions, you should contact an experienced Sacramento tax planning accountant today. The accounting team at Cook CPA Group possesses decades of combined experience that would be proud to utilize to represent you. As the world of cryptocurrencies continues to expand, it is important to be knowledgeable about your tax obligations. To schedule a free consultation to discuss your bitcoin transactions, call Cook CPA Group at (916) 724-1665, or contact us online.