Do I Have to Claim my Bitcoin Profit?

Tax Rules for Digital Currency
Coin Cloud Team
, published on 
April 14, 2021
Do I Have to Claim my Bitcoin Profit?

Every year at this time, the same question comes up: do I have to claim my bitcoin profits on my tax return?

And with more and more people getting into digital currency lately — as well as more and more people making bank due to skyrocketing prices — this is something you really need to know.

Because the answer is yes … you do need to claim digital currency profits on your tax return.

Is it a Currency, Asset or Property?

Bitcoin and other digital currency can be used as both a currency (means of exchange) and asset (store of value). But the government taxes it as a property. Huh?

“Most countries, like the US, tax cryptocurrency as property,” explains CoinTracker, a portfolio tracking service. “Therefore, if the asset appreciates in value and you sell/trade/use it for profit, the gains are taxed like capital gains. If the asset depreciates in value and you sell/trade/use it at a loss, you may be able to deduct the losses against other capital gains to reduce your taxes.”

So in the eyes of the government, bitcoin is an asset rather than a currency. But the type of asset is treated like a property to keep things simple. It either goes up or down in value, netting you a profit or a loss.

If you own the coin for less than a year, it’s subject to short-term capital gains tax. If you hodl it (save it for a rainy day), it’s subject to long-term capital gains tax, but only if you ever sell it for profit, or do another transaction that the IRS considers a “taxable event.” And some taxable events, like bitcoin mining, are treated as normal income.

Taxable vs. Non-Taxable Events

So how do you know if it’s a taxable event or not? Let’s take a look at the types of transactions the US government considers taxable and non-taxable.

Taxable Events:

  • Selling digital currency for fiat currency, such as BTC to USD
  • Trading one digital currency for another, such as BTC to ETH
  • Using digital currency to buy a product or service
  • Receiving cryptocurrency from a fork or mining

Non-Taxable Events:

  • Buying digital currency with fiat currency, such as USD to BTC
  • Donating digital currency to a charity or other tax-exempt organization
  • Gifting digital currency to someone
  • Transferring digital currency between your own wallets

So, when it comes time to do your taxes this year, please be sure to follow the guidelines to avoid tax penalties.

Disclaimer: The information and views supplied on the Coin Cloud blog are for educational and entertainment purposes only. We are not financial advisors, so please do your research and consult with a trusted financial specialist before investing your money.

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