Bitcoin, although a virtual currency, has still managed to make its way to the eyes of the normal people since the last few years. We often see some companies pay their employees with Bitcoin while some retailers accept Bitcoin in exchange for the goods. Worldwide giants like Microsoft, Google, and Facebook etc. have also ventured in to join the race. So how can we afford to put the tax regulations associated with Bitcoin in the back seat? Of course these mandates are very much in line with the advancing Bitcoin adoption by the general public! Now, if a new entrant tries to get into trading Bitcoin, one of the first things he is taught is how the Bitcoin tax works.

How Does Bitcoin Tax Work

Bitcoin has rightly got the status of a convertible virtual currency, so much is it used everywhere in our present economy! Now the sale and purchase of any convertible virtual currency has got tax implications to it. The Internal Revenue Services (IRS) has declared the tax implications with respect to virtual currencies in this regard.

Bitcoin Tax

Just keep the following guidelines in mind if you are Bitcoin trader, as these would help you out on understanding how does Bitcoin tax work.

It is controlled and regulated by the IRS, i.e., the Internal Revenue Services. 

Bitcoin is considered like property in various tax calculations.

Buying Bitcoin is not something classified as taxable in this clause. However, the present value of the token shall be compared to the value when it is sold, and the income generated shall be taxable.

Even if you buy something else out of Bitcoin, it is still considered taxable.

Less than a year in which buying and selling is made calls for short term capital gains, while if this period exceeds a year, it is long term capital gains that must be declared in the tax return.

If Bitcoin trades lead to some losses, it will be used to set off capital gains from the balance sheet.

You are yourself responsible for tracking your Bitcoin proceeds and then declaring them to the IRS for tax purposes.

If you use credit cards that are tied to a Bitcoin wallet, every purchase calls for a taxable event.

Even mined Bitcoin is considered as income from a tax point of view.

Tax Bitcoin

Understanding it Completely: How Does Bitcoin Tax Work

Please note that taxation and return filing is in itself a full-fledged operation for any person from a non-financial background, and when it involves Bitcoin too, it gets all the more hassled and jumbled. Hire an expert like, who can either do this on your behalf by tracking all your Bitcoin transactions from the beginning of each financial year, or by guiding you on how to do this yourself. Bitcoin's implications can be costly and tough to face. It is always good to master this new concept that has recently entered the domain of taxation, before you take things completely on your own.