How should you pay taxes when buying or selling Bitcoin?

Investing in cryptocurrencies used to be pretty straightforward ―and free of many obligations. However, as it became more serious to institutions that crypto is used as a means of payment, trading and investments, a new legal framework needed to be introduced to settle a certain form of control and security over customer’s funds. Therefore, you may need to pay more taxes if you want to buy or sell crypto in the future since regulations will change and might become stricter. 

Ideally, exchanges provide free tax reports that help clients determine their contributions and tax burden requirements. This way, you could import your trades and generate a report based on transactions after you learn how to buy Bitcoin, according to data from Binance. However, the main challenge is being up-to-date with the latest law changes and adjusting your investment strategy. So, how can you handle crypto taxing in 2024?

What are the taxing cases?

You must pay taxes differently depending on the action performed with Bitcoin. Selling BTC for profit, exchanging it with another cryptocurrency, or using it to pay for a service requires you to pay the difference from the initial purchasing price to the sale process. Experts believe the taxing value is similar to stocks and bonds as you have capital gain or loss.

When it comes to Bitcoin mining, you’ll be taxed immediately, similarly to earned income. But if you used it through an exchange, you must pay attention to the value you dispose of because if it’s greater than the initial acquiring price, taxes are to be paid.

Your total yearly income determines your Bitcoin tax rate, so expect high tax rates if you yield considerable results from crypto. At the same time, your taxing amount is linked to the period you’ve owned Bitcoin before selling it. For instance, if you invest in Bitcoin long-term, your taxing rates will be significantly lower than a short-term trader’s.

What’s the paper procedure?

Unfortunately, expect to face some challenges upon filing your taxing report because not every country created and provided one for crypto users. In the US, the IRS is responsible for collecting taxes, and the institution offers paperwork support for investors who must keep track of their income. For 2024, the IRS added a new question on receiving or disposing of digital assets, so look into their importance before filling out your form. Using a special crypto tax software would be helpful if your crypto income is significant.

Luckily, aside from paying these taxes, you can file for Bitcoin losses and deduct a maximum of $3,000 annually. However, be wary of the wash-sale rule because selling crypto for a loss and then claiming the tax break, followed by buying the asset, can be discovered.

What happens if you don’t complete your taxing documents?

A few years ago, taxing on crypto wasn’t even discussed, and even recently, it’s been widely ignored because governments couldn’t provide a specific legal framework for cryptocurrencies. But as the financial ecosystem changes, things get serious, and you might get in trouble for not reporting your Bitcoin activities.

The IRS has found several ways to check users who leverage crypto exchanges so investors can’t hide themselves anymore. Indeed, the institution won’t be able to get each and every person who doesn’t pay their taxes, but carelessly ignoring the taxing requirements leads to getting fined and charged interest for being late on payment. 

In some cases, users might risk a full-on audit. There are ways to avoid penalties if you can’t pay the taxes on time due to lack of funds by applying for a repayment plan that only requires interest.

What should you expect taxing to be like in 2024?

Investors must have their attention on further changes this year, because the dynamic of the legal framework on crypto is constantly altering. Using the services of tax professionals and researching forums will help you stay on top of taxing changes in 2024.

One of the latest and most confusing changes is regarding the tax liability mentioned in Section 6050I, which states that despite constantly reporting crypto transactions, crypto users and businesses won’t benefit from tax liability. At the same time, the user will have to report much more information to the IRS, such as the name, address, social security number, and the nature of the transaction, within 15 days, or they’ll be charged with criminal penalties. However, reporting these aspects can be quite confusing considering the anonymous features that users can acquire on the blockchain or if people receive crypto from anonymous users.

There’s also a problem with the $10,000 threshold that was already used for cash transactions but has now expanded to crypto trading and businesses, meaning full-time traders, stakers, miners, and entrepreneurs must report this threshold within 15 days after the transaction has been made. In this case, the nature of the transaction can’t always be obtained and verified in the case of mining or leveraging decentralized on-chain exchanges, raising further complications for investors.

Finally, the IRS has yet to guide the taxation requirements for unique digital assets. For instance, investors who make income from decentralized counterparties haven’t been clarified on how they should address the issue, considering the difficulty of reporting data derived from this activity. Considering the increasing number of crypto developments and discoveries, addressing NFTs, AI-based cryptocurrencies, dApps and DAOs will get more challenging due to their decentralized nature. Therefore, the IRS and similar institutions must provide broader guidance if they want to gather taxes from crypto investors.

Final considerations

Crypto taxation is becoming tougher by the year, as official financial institutions expect users to report all their income related to Bitcoin. However, as Bitcoin mining is less profitable every four years due to the halving and seeing how challenging the crypto market is, the number of investors giving up crypto will also increase since it will be more challenging to face all the taxes. In 2024, all crypto users must report their income and prepare for additional rules and guidelines.