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If you’re a business that accepts cryptocurrency payments such as Bitcoin, you’re probably wondering, “How is Bitcoin taxed?”
Knowing and understanding how taxes on crypto work is essential to utilizing it in your business. From the perspective of the IRS, cryptocurrency is classified as property or a digital asset. That means any time you sell or exchange crypto, it’s a taxable event.
In most cases, when individual investors are concerned, the IRS will tax crypto as an asset subject to long-term or short-term capital gains taxes. But when crypto, such as Bitcoin, is used to pay for goods or services, it’s treated as income, which carries a different set of tax compliances to consider.
In this article, we’ll be taking a general look at Bitcoin tax preparation for businesses, including some helpful online tools and, just as important, some tips on what not to do.
NOTE: Tax regulations vary by country and jurisdiction, so it’s strongly recommended that you consult with a tax professional or account well-versed in the specific crypto regulations in your location.
How to Report Bitcoin on Taxes
What Is the Bitcoin Tax Rate For Business Transactions?
The Bitcoin tax rate can vary depending on a number of factors, including the specific nature of the transaction. To learn how to report Bitcoin on taxes, understanding all of these factors is crucial. If you receive Bitcoin as a payment for goods or services, then typically, it’s treated as business income, and all applicable income taxes will apply. Depending on the jurisdiction, there also might be a goods and services tax (GST) applied to the sale of goods and services.
How Do You File Taxes on Bitcoin Transactions?
- Recognizing the Income: Bitcoin’s value is typically determined using the fair market value in whatever local currency is being used at the time of the transaction.
- Reporting the Income: Just like with any other form of income, businesses will need to report their Bitcoin income on their tax returns utilizing specific reporting forms that will vary by country. In the U.S., businesses use Form 1099 to report Bitcoin income.
- Investing the Income: If your business holds bitcoin as an investment before converting it into cash, it will likely be subject to the capital gains tax, meaning the business will need to determine the capital gain or loss based on the cost basis and selling price.
- Record Keeping: Detailed record keeping is essential when accepting Bitcoin payments. To meet reporting requirements, be sure to maintain accurate records of all transactions, including noting the value of bitcoin received, the date of receipt, and any associated expenses.
What is a Bitcoin Tax Calculator?
A Bitcoin tax calculator is an online tool or software that is specifically designed to help businesses calculate their obligations related to Bitcoin taxes. Essentially, they automate and simplify the complex calculations sometimes involved in crypto taxation. Typical features include:
- Transaction Tracking
- Cost Basis Calculation
- Capital Gains/Losses Calculation
- Tax Reporting
- Integration with Tax Forms
Finally, there’s one last common question to discuss when it comes to what not to do when accepting Bitcoin payments:
How to Cash Out Bitcoins Without Paying Taxes? (You Can’t.)
If you’re wondering how to not pay taxes on Bitcoin, the simple answer is that you can’t! Not legally, anyway. Cryptocurrency transactions, including cashing out Bitcoins, are subject to taxation in nearly every jurisdiction. To ensure compliance with local tax laws, be sure to keep accurate records and consult with a tax professional or accountant familiar with crypto taxes in your locality.
That said, there are legitimate ways to minimize your tax liability on Bitcoin, and a tax pro can help you identify legal deductions, exemptions, and strategies to help reduce tax obligations.
