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According to Cointelegraph , if passed into law Arizona could start accepting Bitcoin as a tax payment as early as And just what, exactly, would Arizona do without all those cryptoriches?
Definitely not hodl. This, of course, means that someone could be left pretty seriously out of luck if the price of BTC or Ether suffers any kind of drop after payment has been made but before the state has converted the coins to USD. And, well, sudden price swings are the norm in the world of Bitcoin.
Treasury acknowledged the growing importance of bitcoin when it announced that bitcoin-related transactions and investments cannot be deemed illegal. At the start, bitcoin's attractiveness was attributed partly to the fact that it wasn't regulated and could be used in transactions to avoid tax obligations. Also, government authorities around the world soon realized that bitcoin attracted black marketers who could make illegal deals. Around the world, tax authorities have tried to bring forth regulations on bitcoins.
Internal Revenue Service IRS and its counterparts from other countries are mostly on the same page when it comes to the treatment of bitcoins. The IRS has said that the bitcoin should be treated as an asset or an intangible property and not a currency as it is not issued by a central bank.
Bitcoin's treatment as an asset makes the tax implication clear. The federal agency said in July that it was sending warning letters to more than 10, taxpayers it suspects "potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.
The IRS has made it mandatory to report bitcoin transactions of all kinds, no matter how small in value. Thus, every U. Because bitcoins are currently being treated as assets, if you use bitcoins for simple transactions, such as buying groceries at a supermarket, you will incur a capital gains tax either long-term or short-term depending on how long you held the bitcoins.
When it comes to bitcoins, the following are different transactions that will lead to taxes:. Scenarios one and three entail mining bitcoins, using personal resources, and selling them to someone for cash or equivalent value in goods and services. The value received from giving up the bitcoins is taxed as personal or business income after deducting any expenses incurred in the process of mining.
Such expenses may include the cost of electricity or the computer hardware used in the mining of bitcoins. Scenarios two and four are more like investments in an asset. If bitcoins are held for less than a year before selling or exchanging, a short-term capital gains tax is applied, which is equal to the ordinary income tax rate for the individual. In the U. Thus, individuals pay taxes at a rate lower than the ordinary income tax rate if they have held the bitcoins for more than a year.
However, this also limits the tax deductions on long-term capital losses one can claim.
Taxation on bitcoins and its reporting is not as simple as it seems. For starters, it is difficult to determine the fair value of the bitcoin on purchase and sale transactions. Bitcoins are very volatile and there are huge swings in prices on a single trading day. The IRS encourages consistency in your reporting. Also, frequent traders and investors could use " first-in, first-out " FIFO or " last-in, first-out " LIFO accounting techniques to reduce tax obligations.
Internal Revenue Service. Treasury Financial Crimes Enforcement Network. In other words, if the value of the currency does not cover your entire tax bill, you must still pay the full amount. It has already passed the full Senate. Arizonans Could Soon be Able to Pay Taxes in Cryptocurrency A bill to allow cryptocurrencies like Bitcoin as payment in the state is working its way through the Legislature.