The rise of Bitcoin is well documented. So too is the digital currency’s dark side and volatility. No matter how much negativity is thrown at the coin, though, or analyst warnings, it continues to build in popularity. As cryptocurrencies work their way into the mainsteam, investors and traders grow increasingly curious about their taxation. So, how is Bitcoin viewed in the eyes of the tax man?
Whole populations are growing fonder of the world’s most popular digital currency. Skyrocketing value proves enough for most people and corporations to overlook Bitcoin’s unpredictability. Naysayers grow scarcer by the week as well, making more people see the coin as a great investment option.
It is not just people who have come to recognize the value of Bitcoin. Corporations across the board, in all forms and sizes, are accepting the coin, too. In turn, this led to a greater interest in its tax value. Entire governments, especially in Asia, now recognize the trade of crypto coins. They have also stipulated income tax procedures and return filing treatments.
As is their nature, cryptocurrencies remain a gray area for the most part. In most countries, there are no real set rules guiding users on their tax treatment. That does not mean, however, that coin traders and investors can not find themselves on the wrong side of the IRS or its international equivalents.
What truly shone the spotlight on cryptocurrency taxes is the “division” of Bitcoin. Recent weeks saw Bitcoin Cash emerge, a different crytocurrency entirely derived of the original. The question on most people’s minds is whether the newly acquired coins should be treated as a capital gains, free cash or earnings?
While there is no definite answer yet, Learnbonds would like to explore the question and offer a possible guideline.
Issue with Bitcoin (BTC) and Bitcoin Cash (BCH)
Let us first consider the fork in the Bitcoin (BTC) blockchain. BTC is crytocurreny, or what many people would refer to as virtual money. Accessible worldwide by those who wish to transact with it, it is a central ledger off sorts that is also secure and built around privacy.
The coin’s popularity is in part based on this privacy feature as is with other blockchain currency. However, its use increase leads to a scaling problem. Hence the creation of Bitcoin Cash (BCH).
There are a few low points to Bitcoin transactions. Leading the complaints is their lag. Authenticating a transaction in the network can take up to 20 minutes or longer in some cases. That is far from efficient, although some argue that it is the price of using the coin. This argument falls flat in the face of other crypto coins capable of much greater transaction rates, like BCH.
BCH was inspired by the notion that transactions should be less congested. The idea for the new currency came from blockchain developers and coin miners. Large groups of people and organizations using BTC agree that widespread use leads to more people making trades at the same time. This in turn compromises scaling and speed.
With the help of SegWit technology, verification data was compressed. This is only a small fix to a very large problem, though, and only does so much. BTC was eventually split into two variants, BTC and BCH. The latter promises faster authentication rates but is also a separate coin entirely.
What’s the problem?
The problem lies in the results of the split. Now there is BTC and BCH. After the split took place, many of those who had Bitcoin in their wallets gained the same value in BCH. Those who were against the split were even more infuriated by this and rallied for consequences like heavier taxes. The thing is, though, not many people are sure if the activities of their Bitcoin wallets are even taxable.
The tax man and BTC
What is obvious is that the sale of Bitcoin or any other asset is subject to income tax. Some are adamant that the receipt of the new BCH in their wallets is free cash. Bearing that, people’s newly acquired BCH are not taxable.
The mining of Bitcoin is an income generating activity. That is actually taxable under income taxation rules. Tax authorities like the IRS have already stipulated that BTC are considered asset property.
Holding BTC, however, is like holding any other asset. A held asset’s increase in value, like gold, is a capital gain. Those gains are not normally taxable. This is because selling a held capital asset at its value is merely a conversion to cash. Owners of BTC have neither profited or lost from the transaction in this regard.
That said, BCH were acquired and can be traded at 100 percent profit. As an income generating activity, that too can make them taxable. Know that income tax applies to income generating activities. In some countries, it is the intention of the user that determines how the BTC and BCH are treated.
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