Bitcoin’s price started declining in November 2021 and not just this digital currency, other cryptocurrencies such as Ethereum, common crypto used by NFT buyers also started tanking and lost almost $1,000 in value.
The Biden administration’s attempt to regulate crypto as Bitcoin poses a threat to national security. When the government started taking action, several traders and investors sold their Bitcoin holdings.
Another reason behind the price fall is the US Federal Reserve’s policy changes. The chairperson of the reserve said that the Federal Open Market Committee raised the double monthly rates to control inflation, which in turn reduced asset purchases and negatively impacted the Bitcoin prices.
If you sell Bitcoin now, will you have to pay tax on Bitcoin? Read on to find out.
What Does it Mean for Bitcoin Investors?
Even though Bitcoin had a rocky start in 2022, the selling pressure is gradually wearing off. And historically speaking, Bitcoin makes positive returns in February giving short-term traders some hope as technical indicators suggest they could stay active around the $35,000-$37,000 support area.
Recently, BTC has witnessed a spike in price, however, analysts are still on the fence due to the Biden administration releasing an executive order in February to regulate Bitcoin. Predicting whether the new regulations will have a negative or a positive effect on the cryptocurrency is difficult and thus, the coin remains highly volatile. Despite Bitcoin’s history of leapfrogging in February, it could still fail in the third consecutive month. In this scenario, investors usually panic sell and incur losses both on the value as well as short-term or long-term capital gains tax on Bitcoin that they owe to the IRS
Throughout the past nine years, BTC’s average return in February is around 12 percent and approx. 85 percent of the time the coin’s value increased in the second calendar month. If we look at the funds pouring in, investors staked around $22 million into Bitcoin-based funds as the crypto market stabilized by the end of January. For the worst ever start of the year, the crypto market witnessed $19 million flowing in just in the last seven days of January.
Quick Reminder: Investing in cryptocurrency is highly risky and it should be done after sound technical analysis.
Do I Still Have to Report My Bitcoin Profits When Filing Taxes?
Perhaps a few years ago, when cryptocurrencies weren’t on the IRS radar, you would’ve not reported your crypto profits while filing taxes and it would still be permissible. Today, with strict taxation policies, even miners have to file taxes for every Bitcoin they receive. So, do you have to pay tax on Bitcoin? The answer is a resounding ‘Yes.’
Whether you are a seasoned investor or a newbie miner getting started in the crypto world, you have to get prepared for the tax season. Reporting your profits or even losses that you’ve booked throughout the year is an absolute obligation.
The IRS classifies cryptocurrency as property and just like any property, you owe taxes to the IRS when you sell, trade, or dispose of your cryptocurrency and recognize a gain. It is important to remember that buying crypto is not a taxable event. You can buy and hold tokens for a long time without any taxes even if their value increases dramatically.
For you to pay taxes, there needs to be a taxable event such as selling your tokens. If you sell your Bitcoin token within 365 days of holding, you are liable to pay short-term capital gains tax whereas if you sell your coins after a year of holding then you have to pay long-term capital gains tax on Bitcoin. For instance, if you buy a coin at $1,000 and sell it for 1,500 then you have to pay taxes on the $500 you gained. But, if you sell and recognize a loss, you can deduct that from your taxes.
The IRS is taking measures to ensure that every crypto investor is paying their taxes. When investors are filing their taxes, they have to answer a question on Form 1040 if they had any virtual currency-related transaction during the tax year.
Even though Bitcoin is the most sought out cryptocurrency in the market, there’s a high volatility aspect attached to it. More so, even if historically it bounced back every February, there’s no guarantee it will rise this year due to the regulations passed by the Biden administration.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.