Bitcoin is the most widely traded, held and circulated digital currency of all time. It's called a convertible virtual currency due to its being an equivalent value in real currency. While the IRS has been slow to deal with crypto taxes, they are beginning to tighten up. Read on for all you need to know about cryptocurrency and taxes.

Bitcoin Explained 

Before we get into what crypto taxes are all about, let’s first go over what Bitcoin is. Bitcoin uses cryptographic encryption systems to secure transfers and storage between uses. Unlike fiat currency, bitcoin is not printed by a central bank, nor is it backed by any institution. The coins are generated by a process called mining where a high-powered computer on a giant network uses a mathematical formula to produce bitcoins. It takes very sophisticated hardware and hours sometimes days to mine less than one bitcoin. TO obtain them you can either mine bitcoins or buy them from someone with cash or a credit card. Since 2009 Bitcoins have been used on several occasions exactly like a fiat currency to buy goods and services. 

Bitcoin is now listed on many popular exchanges and has been paired with leading world currencies such as the pound, US dollar, and the euro. The US Federal Reserve began acknowledging the importance of bitcoin when it announced that cryptocurrency transactions and investments would not be considered illegal. Initially, the allure of Bitcoin was attributed partly to the idea it wasn't regulated and could be used in transactions that avoided tax obligation. The intangible nature of bitcoin and its universality also made it harder to keep track of cross-country transactions. Also, government authorities around the world soon realized that bitcoin attracted black marketers who could make shady deals without being traced. It was only a matter of time before the tax authorities and government agencies honed in on Bitcoin.

Taxes on Bitcoins

Globally many tax authorities are starting to bring legislative regulations on bitcoins. The US Internal Revenue Service (IRS) and its associated partners from other countries are mostly on the same page when it comes to the treatment of bitcoins. The IRS has stated that bitcoin should be treated as an asset or an intangible property and not a currency since it’s not issued by a central bank of any country. Bitcoin's acceptance as an asset makes the tax implication comprehensible. It may seem like a minor distinction, but it makes quite a difference. This determines how bitcoins are taxed, what information will be needed to make sure your taxes are calculated correctly, and what tax planning techniques you can use to minimize your taxes on bitcoin transactions.

IRS Cracks Down

The IRS has made it mandatory to report bitcoin transactions of all kinds, no matter how large or small in value. Thus, every US taxpayer is required to keep a record of all buying, selling, investing in, or using bitcoins to pay for goods or services, which the IRS considers bartering. Since bitcoins will be treated as an asset, if you use bitcoins for simple transactions such as buying food at a grocery store, you’ll incur a capital gain.

Taxable and Nontaxable Events

A taxable event is simply a specific action that triggers a tax reporting liability. Whenever one of these 'taxable events' occurs, you’ll trigger what’s called a capital gain or capital loss that is required by the IRS to be reported on your tax return. Here are a few of the major taxable events to look out for: trading cryptocurrency to a fiat currency like the euro or US dollar, trading cryptocurrency to cryptocurrency, using cryptocurrency for goods and services, and earning cryptocurrency as income. A nontaxable event is just the opposite. These are events that incur no capital gains and are not considered required to be reported. Here are some examples: giving cryptocurrency as a gift to someone, a transfer from a wallet, or purchasing cryptocurrency.

Cryptocurrency Tax Software

You will need to pay taxes on your digital asset investment tax returns unless you reside in a country that doesn’t require you to pay capital gains taxes. Cryptocurrency tax software is software built for cryptocurrency traders to solve the tax reporting problem. It allows cryptocurrency users to aggregate all of their historical trading data by integrating their exchanges and making it easy to bring everything into one platform. Many traders and investors are beginning to use this software to securely create their required cryptocurrency tax reports.

The Blockchain is a public ledger, which means anyone can view the ledger at any time. Figuring out a person’s activities on that ledger comes down to placing a wallet address with a name. Making the decision not to report your crypto transactions is a risky decision that could subject you to tax fraud which could be punishable by criminal prosecution, a fine of up to $250,000 couple with five years of imprisonment. If you’re getting into Bitcoin or other forms of cryptocurrency, be sure to know when you should report your taxes and why.