Bitcoin investors frequently seek the advice of California cryptocurrency tax attorneys regarding whether or not they will owe taxes. The answer usually depends on when the Bitcoin was purchased and when it was spent.

Bitcoin Explodes in Late 2020

Although in 2017 cryptocurrency enjoyed a substantial surge, the following years were relatively quiet until late 2020, when Bitcoin rose again to an eye-catching value of almost $30,000 for a single coin by the end of the year. This motivated many investors to jump into the world of cryptocurrency investments, while it caused others to sell coins they had been hoarding for several years.

Consumers are Cautioned About Tax Consequences

Crypto tax lawyers caution consumers about tax penalties, and investors would be wise to heed these warnings. How much is owed on such investments typically hinges on the value of the Bitcoin when it was purchased and its value when it was sold. This is because the Internal Revenue Service places virtual currency in the category of property, meaning it is subject to capital-gains tax.

Tax Rates for Cryptocurrency Profits

If you are new to the world of Bitcoin investments, you may be surprised to discover that cryptocurrency is treated like stocks by Uncle Sam, and therefore you do not have to pay tax on it until it is sold. Owing taxes, or not, simply depends on whether your cryptocurrency was sold at a profit or a loss. If you owned it for a year or more, you will have to pay the long-term capital-gains tax rate on all profits, which is determined by your gross annual income.

If you are single and earn $40,000 or less per year, you will not have to pay capital gains tax on cyber currency profits. If you earn between $40,000 and $441,450 annually, the rate is 15 percent. If you earn more than $441,450, that rate goes to 20 percent. It is a good idea to use the IRS’s worksheet to determine the amount owed if your income is above $441,450 per year.

Selling at a Loss

Fortunately, a crypto tax attorney can confirm that if your Bitcoin was sold at a loss, you can write off the amount of that loss on the appropriate year’s tax return. It is therefore essential to look at where you took losses during the tax year, as well as where you made a profit.

Cryptocurrency losses can be used to lower your taxable income by up to $3,000 for single filers and up to $1,500 for taxpayers who are married but filing separately. Additional losses can be carried over to future years as well.

IRS Is No Longer Being Lenient with Unreported Bitcoin Gains

You may be wondering what the minimum reporting requirements are where Bitcoin is concerned. A crypto tax lawyer will tell you that profit of any amount must be reported, and a question concerning cyber currency has been added to this season’s 1040 form for the first time. The IRS believes there is substantial underreporting in this area and is planning to crack down on this form of tax fraud on cryptocurrency transactions in the coming years.

Previously, filers have gotten away with feigning ignorance regarding their failure to report Bitcoin gains, but these excuses will no longer be accepted in the future. For this reason, in order to avoid tax penalties, all filers should declare any profit made from cryptocurrency. This is true even if you spent the Bitcoin on a retail purchase. In the eyes of Uncle Sam, there’s not much difference between spending cryptocurrency and selling it. For example, if you bought one Bitcoin for $3,000 in 2019 and then used it to make a substantial purchase this year because it is now worth $40,000, the capital gains must be reported to the IRS.

Ultimately, contacting a California crypto tax lawyer is the best course of action for anyone concerned about owing taxes on Bitcoin investments.