Categories: Bitcoin Business

How Bitcoin Is Taxed

Click here to view original web page at www.forbes.com

One of the most common questions I get from investors is how crypto investments like bitcoin are taxed. There seems to be a great deal of confusion, perhaps because of the different names people use for this new asset class.

  • If bitcoin is a cryptocurrency … is it taxed like currency?
  • If bitcoin is “digital gold” … is it taxed like gold?
  • If bitcoin is a commodity … is it taxed like oil?

It's actually not that complicated. Let’s clear things up.

(Note: As with any article that discusses tax treatment, the usual disclaimers apply: This is a generalized overview, does not represent advice, and may not apply to your situation. Do not use this article to make tax or investment decisions. Consult your tax expert.)

How Is Bitcoin Taxed?

The good news is that bitcoin and other crypto assets have just about the best possible tax treatment available for long-term investors. According to the IRS’ official guidance on crypto taxation, crypto is taxed as “property,” which is just a fancy way to say it's taxed like a stock. If you buy bitcoin and hold it for more than a year, you pay long-term capital gains when you sell.

For federal taxes, that means you pay a 15% tax on any gains, unless you make a lot of money (more than $479,000 (for married couples) or $425,800 (for individuals)), in which case you pay 20%.

That compares favorably with almost every other alternative investment.

For instance:

Gold: Gold is taxed as a collectible. That means, no matter how long you hold it, the lowest tax you can pay when you sell is 28%. And yes, this is true even if you hold a gold exchange-traded fund like the SPDR Gold Shares (GLD); there’s nothing magical about wrapping physical gold in an ETF that changes its tax treatment.

YOU MAY ALSO LIKE

Currency: Currency is taxed at regular income rates. No matter how long you hold a currency investment like the Invesco CurrencyShares Japanese Yen Trust (FXY), you never qualify for long-term capital gains. Instead, you pay your marginal income tax rate on any gains, up to 37% on federal taxes. Ouch.

Commodity Futures: Commodity futures–and ETFs that hold commodity futures like the US Oil Fund (USO)–are what’s called Section 1256 contracts for tax purposes. That means two things, neither of which are good for long-term investors:

  1. First, any investment in a Section 1256 contract is “marked to market” at year-end, which means you owe taxes on paper profits at the end of the year even if you don’t sell.
  2. Second, regardless of your holding period, 60% of any gains are considered long-term capital gains, and 40% are considered short-term capital gains. That means the blended tax rate for someone in the highest federal income tax bracket is 26.8%.

The relatively high tax rate is unfortunate, but it’s the mark-to-market feature that kills long-term investors. People really don’t like paying taxes on paper profits, and the inability to defer taxation can have a meaningful impact on long-term returns. (For short-term investors, Section 1256 contracts can be beneficial, as the 26.8% maximum tax rate is less than the short-term capital gains tax rate (up to 37% for high earners)).

Bitcoin futures, for what it's worth, are considered Section 1256 contracts, so they fall under this tax classification; direct holding of “physical” bitcoin (or investing in a fund that holds bitcoin) does not.

Bitcoin's tax treatment is better than most other alternative strategies for long-term investors. Photo credit: Getty

Concluding Thoughts

As clear as the core guidelines for crypto taxation are, there are a few areas where more guidance is needed. Fortunately, the IRS recently announced plans to offer guidance on how to handle hard forks and air drops, the right way to establish the cost basis of any crypto position, and other minor topics. (Original note; helpful context.)

The most important thing to remember, however, is that crypto assets like bitcoin are taxed like stocks. If you hold for less than a year, you pay short-term capital gains taxes; if you hold for more than a year, long-term capital gains apply.

[Full disclosure: The author has a long position in bitcoin.]

cinerama

Illuminati, Mason, Anonymous I'll never tell. I can tell you this, global power is shifting and those who have the new intelligence are working to acquire this new force. You matter naught except to yourself, therefore prepare for the least expected and make your place in the new world order.

Disqus Comments Loading...
Share
Published by
cinerama

Recent Posts

Elizabeth White: Helping merchants join the Bitcoin vision

A huge part of making Bitcoin SV (BSV) the new currency of exchange for the world is in developing real… Read More

2 hours ago

‘Youngest Bitcoin Millionaire’ Willing to Stake it All on Metal Pay

Metallicus, the startup behind the peer-to-peer payments platform Metal Pay , received an undisclosed angel investment from the youngest bitcoin… Read More

2 hours ago

Privacy Crypto Dev Attempts to Expose Self-Proclaimed Bitcoin Creator

Anonymity and privacy are extremely important in the crypto industry. The original crypto that the entire industry is based on… Read More

2 hours ago

Bitcoin’s 2019 Gains Not Fuelled on Chinese Capital Flight Onlyh, Claims Circle CEO

According to Jeremy Allaire, the price increases in Bitcoin since the beginning of the year were driven by more than… Read More

2 hours ago

CZ Claims Binance’s Venus Stablecoin Project to Help Facebook’s Libra

Many deem Binance's newly announced Venus stablecoin project as a competitor to Facebook's Libra crypto. But Binance's CZ says otherwise.… Read More

2 hours ago

Bitcoin’s Satoshi Reveal Part 2: Lost Private Key, the CIA, & the Godfather

In part two of his 'Satoshi reveal', self-proclaimed Bitcoin creator Bilal Khalid unveils where all his bitcoins are and much,… Read More

2 hours ago

This website uses cookies. We use these cookies to collect data about your interaction with our website for the purpose of continuously improving your experience with our site. For more information we encourage you to read our privacy policy.

Read More