How is Bitcoin Taxed?

Bitcoin is a digital currency, also known as cryptocurrency. It is completely virtual, and the physical coins you see are worthless without their matching code. The idea is that it can be used anywhere regardless of that location’s national currency, but many businesses do not accept it.  

How does Bitcoin work? 

Each Bitcoin has a unique code associated with it. It can be stored in an app, like a digital wallet. You can share Bitcoin through these apps, a lot like Venmo or Apple Pay. Each of these codes is decoded by a computer program when a transaction is made. The transaction is logged in what is called the blockchain, which is a public record of all Bitcoin transactions.  

How is new Bitcoin created? 

Bitcoin is created through mining. Bitcoin mining involves using computer software to solve problems. When one of these problems is solved, the user is reward with Bitcoin. These Bitcoin have new codes associated with them, so they are new. Right now the reward for solving a problem is 12.5 Bitcoin. To keep inflation from occurring, the problem gets harder to solve each time, and the reward also gets smaller. By 2040, there will be 21 million Bitcoin in circulation. Then Bitcoin mining will end. 

What is the value of Bitcoin? 

Bitcoin fluctuates all the time, just like stocks. It has no use value. It only has exchange value. Bitcoin are valuable because people exchange them for real goods and services, including cash. 

How does Bitcoin affect my taxes? 

The IRS treats Bitcoin like property. This means that all transactions have capital gains implications. Mining coins is equivalent to earning income; trading, converting, and spending Bitcoin will produce capital gains or losses, and receiving payments in Bitcoin is seen as income at fair market value at the time of the transaction. 

How is it different from a traditional currency? 

Bitcoin is not controlled by any government or bank. This means that no one is forced to accept it as payment. It also means that anyone can accept it as payment. No one can reverse a transaction once it goes through. As mentioned previously, Bitcoin has a limited supply to prevent inflation. Traditional currency controlled by a central bank has an unlimited supply because the bank can always issue more. Another difference is that Bitcoin is traded through a digital address, which means transactions are relatively anonymous.

This article was last edited on September 17, 2021..

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