If you run an online business of any type, it’s vital you report your earnings and pay taxes on your income. However, many people are unsure whether their bitcoin transactions are taxable. Although bitcoins are a relatively new form of currency, ordinary tax laws still apply. With that in mind, failure to report your bitcoin income could cause you to face legal trouble. You could receive fines or time in jail, depending on the amount owed, so if you want to protect yourself from receiving legal action, then you must take steps to ensure you are always in compliance with the law.
Recording Your Earnings
Anyone who is experienced with running and managing a business likely knows how to monitor their income. But if you are new to earning money online, then you might be feeling a little confused. You must take proactive steps to keep records of all of your bitcoin earnings. Because bitcoin transactions are trackable, you must also log your bitcoin address in case you get audited. Although reporting your bitcoin income is important, you must also report your expenses.
If you use a computer exclusively for your online business, then you can deduct any maintenance and repair costs as a business expense. But you must also consider other expenses that are required to keep your business running effectively so that you can receive as many deductions as possible. How you store your tax data is a personal choice, but it’s recommended to use an excel file. No matter what method of storage you use, it’s vital you keep backups of your digital records in case your computer is damaged.
Reporting Your Earnings
You might be wondering if you should file your tax documents every January. When working for a company, you have money taken out of your check for tax each week, so in the same way, the government does not want to wait until the first month of the year to get paid when you earn bitcoins. So, it’s important to report your earnings on a quarterly basis, and although doing so might seem frustrating at first, it helps you avoid paying a large sum once a year. If you don’t calculate your taxable income correctly, then those yearly tax expenses would be a lot more than you might think.
Many people get confused on how they should report their bitcoin income because the value of this digital currency does not remain consistent. The price at which you sell a bitcoin is not always the same price you paid for it. If the value of a bitcoin goes up after you buy or earn it, then you will experience a capital gain. On the other hand, if the value goes down, you will experience a capital loss. These value fluctuations must be accounted for when you report your income. But remember, you don’t have to convert bitcoins into other forms of currency for this rule to apply. When you spend digital currency, a capital loss is still a factor and can be deducted from your taxable income.
The Danger of Loopholes
Some people feel tempted to find loopholes so that they can avoid paying their taxes. Although these methods do work on occasion, the consequences can be harsh if you are discovered. When trying to evade taxes, some people try to set up more than one bitcoin wallet, and they believe that doing so prevents them from being tracked. However, each person’s IP address is logged at the time of the transaction. Another method that people have tried involves selling bitcoins that have lost value right before reporting their income. Because these tactic has been used in stock trading, the government has set up a rule to stop it, so buying bitcoins back within 30 days of selling them prevents you from reporting them as a loss on your tax report.
You might occasionally be selected to receive an official audit. When this happens, you are required to provide documents that prove you were honest in the reporting of your taxable income. If you cannot provide the required documentation when asked to do so, you will likely have legal action taken against you. If you had reported any deductions, then you will also be required to prove that you were eligible to receive them. So, you must do your best to report your income honestly and accurately so that you can avoid problems in the future.
Although some people feel as though their bitcoin income is not taxable, they are mistaken. No matter the type of currency, if you receive money for selling products or services, you must report and pay taxes on it. Even if you feel tempted to do so, never try to take short cuts or to cheat the system so that you can save money. Doing so might work for some time, but it will cause more harm than good in the long run. On the other hand, correctly reporting your bitcoin income and paying your taxes will enable you to run your business in a way that is both legal and safe.