Should you pay taxes on bitcoin? It depends when

 Should you pay taxes on bitcoin? It depends when

After a relatively quiet few years after a brief spike in 2017, bitcoin rallied again in late 2020, ending the year with a single coin worth just under $ 30,000.

The meteoric rally prompted many investors to invest in cryptocurrency for the first time, while others who held their bitcoins for a while took advantage of the exploding token price to sell some of their assets for profit.

But as Tax Day approaches, some users will come face to face with the fact that they now have to pay taxes on this income. Depending on when you bought and sold your bitcoin, as well as other factors such as your income, you may be on the hook to pay.

The IRS classifies virtual currencies as property. What does this mean?

Bitcoin and other cryptocurrencies are classified as property and subject to capital gains tax under US tax laws. But you should only pay taxes when these profits are realized.

Just because your Coinbase portfolio has skyrocketed in value over the past year doesn't mean you'll be writing a check to Uncle Sam in April. As with stock trading, you only need to specify the profit generated from bitcoin as income when you decide to sell.

If you never sell your bitcoin, you’ll never have money, Ben Weiss, chief operating officer of CoinFlip, the largest Bitcoin ATM provider in the country, told CNBC Make It. Bitcoin is treated as if you bought and sold shares.

I sold my bitcoin in 2020. How much do I owe?

It depends on how long you have held Bitcoin and whether you have sold it at a profit or at a loss. If you have owned your bitcoin for over a year, you will pay a long-term capital gains tax rate on your profits, which depends on your income. For individual applicants, the capital gains tax rate is 0% if you earn up to $ 40,000 per year, 15% if you earn up to $ 441,450, and 20% if you earn more. This IRS worksheet can help you do the calculations.

If you have owned a cryptocurrency for less than 12 months, the taxes you pay will be the same as your regular income tax rate.

If I only sold a few bitcoins, do I still need to report it?

Yes. Any profit must be reported to the IRS. For the first time, this tax season's 1040 Form includes a front-page virtual currencies question asking taxpayers did [they] receive, sell, ship, exchange, or otherwise acquire a financial interest in any virtual currency at any time during 2020? 

The IRS believes there is massive underreporting in this area, Ryan Lozi, a certified public accountant (CPA) at Piascik, told Make It. And they're going to start targeting that.

What if I spend my bitcoin at a store that accepts cryptocurrency?

In the eyes of the IRS, spending bitcoin is not much different from selling it, especially if the value of your ownership has increased significantly since you first purchased it. The IRS website states that using virtual currencies to pay for goods or services. ... ... usually has tax consequences that can lead to tax liabilities. 

If you purchased one bitcoin for $ 3,000 last March and then used the same coin, now worth over $ 50,000, to pay Tesla this week, you must report the capital gain on the transaction.