Frustrated that savvy rich people will hide from the White House’s newly proposed tax hikes last week and sock it away into Bitcoin? Don’t worry. They can’t. And neither can the rest of us. If you’re selling Bitcoin for dollars, especially on a U.S. exchange, Uncle Sam will find out about it.
President Joe Biden said he would like to hike capital gains taxes for people with incomes of more than $1 million. The top rate for long-term capital gains for them would nearly double to 39.6%, from 20%. While most of us don’t have that much money in wages, dividends and other yield bearing investments to worry about this massive wealth transfer to the State, those who do will not be able to hide it in cryptocurrencies…in the U.S. at least.
The IRS treats cryptocurrencies as a security. Like any other tradable currency, you get hit with capital gains and capital losses only when you sell. This goes for all of us riff-raff, not just the millionaires. The capital gains that you get from the sale or trade of Bitcoin for another asset are treated as taxable income.
Barely half a percent of taxpayers had reported income of over $1 million (as of 2018). Hiding out in Bitcoin wouldn’t help them, unless they could hook up with some offshore haven in Dubai. (They probably will.)
Bitcoin can still be a tax avoidance, but that is becoming harder when it comes to selling. Anyone with a Coinbase account, for example, will get year-end tax documents that are required reporting to the IRS, showing how much they sold.
The same goes for people with Bitpay accounts who are moving Bitcoin to their Bitpay Mastercard. That’s an exchange of BTC for USD, and that’s a sale subject to capital gains, even though the system for calculating this on behalf of the exchange or wallet where your crypto is stored has a lot of holes, says CryptoTaxCalculator CEO Shane Brunette.
“If you’ve sent X amount of dollars worth of BTC from an exchange to a crypto supported credit card, then the credit card company has no idea of the cost basis for the Bitcoin, so if they tried to generate any reports the calculations will be incorrect,” he says. “This example is actually part of a larger problem. Whenever you transfer crypto from any exchange, the receiving platform will not have your original buy price and therefore will not be able to produce accurate tax reports. You would need crypto tax software to track your transactions across all platforms so that an accurate calculation can be made.”
Simply buying and holding Bitcoin is not taxable; just like stocks. Only stock dividends would be taxable as they are considered income even if you used them to repurchase more shares.
The IRS taxes Bitcoin if:
1. Sold BTC for fiat currency
2. Sold BTC to buy another cryptocurrency
3. Sold BTC to pay for a dollar denominated good/service
4. Earning BTC as income
See: IRS Cryptocurrency Guidance
How Rich Are We Going To Get From Bitcoin in 2021?
The best way for us retail investors to think about Bitcoin and all the alt-coins we are buying these days on Coinbase is to just treat them like a stock. Coinbase is the new E-Trade. Dogecoin is the new penny stock you hope goes to $2.
If all of your trades are bought and sold on Coinbase, they will know your starting price and your selling price. And they will send you tax documents next year for fun tax season. Yeah!
Will we get richer this year in Bitcoin?
“I know that ‘whales’ are accumulating as much BTC as possible while weaker-handed retail investors capitulate and sell,” says Elena Sinelnikova, MetisDAO CEO and co-founder based in Toronto. “But then there’s the counterpoint, which is that BTC dominance is at its lowest point in three years, and it’s very much alt-coin season. So we are in wait-and-see mode for now on where Bitcoin is heading,” she says. “If Bitcoin doesn’t ‘go moon’ every day, it can still act as a healthy hedge against inflation.”
As of Sunday evening, Bitcoin was down again by 1.47% to $56,857.
Wealthy investors may be using Bitcoin as an inflation hedge. But if they’re selling, and Biden gets his wish on the capital gains front, about half of those gains will be sent to Washington first.