Tax Filing Tips if You Earn Wages in Bitcoin in California
Cryptocurrencies are all the rage in the financial sector today. As cryptos such as bitcoin become more popular, the laws governing financial income and taxes are adjusting to govern them. Knowing how the government accounts for cryptocurrency income is important for understanding your tax liability and reporting accurately so that you avoid penalties and stay in compliance.
Cryptocurrency as an investment is viewed differently than cryptocurrency as a wage. If you are paid in bitcoin, you are receiving income that is equivalent to the appropriate dollar amount at the time you receive it. You will not be able to deduct for any decrease in the value of bitcoin following the receipt of your wage. Subsequently, if you hold the cryptocurrency for a certain period of time, it becomes what is known as a capital asset. Therefore, any gains that you realize upon selling the cryptocurrency will also be taxed.
Navigating tax filings that involve bitcoin is a new and hazardous undertaking. You shouldn’t attempt to do it alone. The dedicated California tax attorneys at NewPoint Law Group, LLP, stay on top of developments in tax law so that you don’t have to worry about them come filing season. Call our offices at 800-358-0305 to speak with us about filing taxes on your bitcoin wages.
Filing Taxes if You Get Paid in Bitcoin in California
When you are paid for work in bitcoin or another type of cryptocurrency, the government still considers those wages as immediately taxable income. This means that you will have to do some calculation to determine what you may owe in income tax.
For income tax purposes, the transaction of cryptocurrency as a wage from your employer is a realization event. In other words, once you get paid, you have “realized” (or actually acquired) income, and the government will treat that income just like it would if you had been paid in cash. But the government doesn’t tax people in bitcoin. They use the good old fashioned American dollar, so you will have to look at conversion values to determine how much you actually made.
According to the Internal Revenue Code, the value of income that you receive in wages that isn’t actually U.S. currency is calculated by determining the fair market value of the income at the time of the realization event (i.e., your crypto “paycheck”). Therefore, the number that the IRS cares about is the dollar value of the amount of bitcoin or other crypto that you received at the time that you received it.
Determining how much income you received in bitcoin wages over the course of a year can be an arduous task as April 15th nears. Our advice is that you keep diligent records throughout the year of the amount of crypto that you receive, the dates and times at which you actually received it, and the conversion value of the crypto vehicle to the U.S. dollar at those dates and times. This is a daunting task, but our hardworking Elk Grove tax attorneys can help you organize and plan your record-keeping strategies.
Capital Gains Taxes for Bitcoin in California
Regardless of how you come into your bitcoin or other cryptocurrencies, if you hold onto it as an investment, you may be subjecting yourself to capital gains taxes down the road. The IRS determined in 2014 that cryptocurrency will be viewed as property. For tax purposes, this means that difference in value of the bitcoin between the time that you acquired it and the time that you sold it is relevant to your tax filings.
If your bitcoin increased in value from the date of acquisition to the date of sale, that additional value will be treated as a capital gain and subject to tax. The tax rate for capital gains depends on several factors, including the taxpayer’s joint or individual annual income and the amount of time that the cryptocurrency was held.
You can also deduct from your income any loss in value on bitcoin that you have sold. In order to declare a capital loss on a crypto holding upon its sale, the value of the bitcoin at the time of the sale must have been lower than the value at the time it was acquired.
A realization event for capital asset purposes can occur in instances other than just your decision to sell bitcoin for U.S. dollars. Capital gains and losses are recognized where cryptos are exchanged for other currencies or cryptocurrencies, or if they are used in a purchase of goods or services. You will have to keep track of the fluctuation in your crypto’s valuation any time that your crypto changes hands.
The one notable exception is bitcoin that the taxpayer derives by actually mining. If you mine bitcoin, the bitcoin that is produced becomes taxable immediately.
What You Should Know About Bitcoin Wages in California
If you are being paid in bitcoin or another variety of cryptocurrency, you face the possibility that you could be taxed twice. That is the risk that comes with being paid in something other than the almighty dollar. Further, diligent record keeping is required to stay in compliance with the Internal Revenue Code guidelines on reporting income from cryptocurrency transactions. Further, these laws govern a developing world of technology and finance, and are subject to constant changes.
Successfully avoiding pitfalls regarding tax liabilities associated with cryptocurrency assets in California requires a steady and experienced hand. We strongly urge you to enlist the help of our respected tax attorneys for help with your tax filings involving bitcoin and other cryptocurrencies.
Earning Wages in Bitcoin in California? We Can Help You File Your Taxes.
At NewPoint Law Group, LLP, we pride ourselves on our ability to stay on top of the hottest trends in tax law, so that you don’t have to. File your taxes for bitcoin wages right with the help of the experts. Call us today at 800-358-0305.