Tax imperatives of Bitcoin trading

Although the current U.S. president, Mr. Donald Trump, has stated unequivocally during the presidential campaign that got him elected, that he is too smart to pay taxes; a famous saying, attributed to another U.S. president, Mr. Benjamin Franklin, suggests that death and taxes are the only two things that are certain in the lives of […]

Although the current U.S. president, Mr. Donald Trump, has stated unequivocally during the presidential campaign that got him elected, that he is too smart to pay taxes; a famous saying, attributed to another U.S. president, Mr. Benjamin Franklin, suggests that death and taxes are the only two things that are certain in the lives of an American. Well, all humans will die at some point no matter where they come from; so dying is given for anyone! However, as an American, you will also not be able to escape paying taxes for long. Tax collection in the U.S. and in all progressive civilizations is at the center of generating the means of paying for the expenses incurred by a government.

Thus, the American tax collection and enforcement processes are efficient for the most part, and you may not be able to perpetually dodge your tax obligations. Countries like Nigeria, though heavily burdened by corruption and massive embezzlement that lead to astronomical tax income losses for the government, are also trying to learn a page from the American tax collection and regulation enforcement processes.

So you can understand why cryptocurrencies like Bitcoin, whose original major attractiveness appears to be anonymity, are a tax collector’s nightmare.  Other attractive qualities of Bitcoin include the ability to carry out global transactions without going through all those hassles that the banks and, sometimes, the governments, represent. You need to be credit-worthy to have credit cards, and, depending on your country, easy global access to your funds in a checking account; say, using the debit card; is not always assured. You do not need bank accounts or credit cards to get and spend Bitcoin. The currency also offers privacy and an easy, fee-free way to transact business across international borders. The currency cannot easily be confiscated by any government, implying some kind of security!

Until recently, the U.S. government did not seem to accept Bitcoin with open arms since its inception in 2009. The dealings in Bitcoin were unregulated and the currency was quite convenient for paying for illicit drug trafficking and for money laundering. Because of the small volume of activity, the U.S. government seemed to have been on a “watchful waiting” mode before March of 2013. However, the government’s posture has changed dramatically in light of the phenomenal “appreciation” of Bitcoin. Even then, the laws are still far from catching up with the importance that cryptocurrencies have gained.

Its volatility notwithstanding, folks are making tons of money from Bitcoin, and the taxman wants his cut. Let’s examine some of the ways that Bitcoin traders generate taxable incomes.

The jump in the value of Bitcoin means that an investment, say of a few thousands of dollars a few years ago, may be worth ten thousand dollars today. So, like any investment – for example, stocks – you are liable to report the appreciation and pay tax on it. I should quickly remind you again that, because of the astronomical rise in the value of the Bitcoin, the tax laws are far from catching up. This in essence implies that the basic guidelines issued by the U.S. Internal Revenue Service (IRS) in 2014 for digital currencies, may be subject to interpretation! However, ideally, every time you transfer a cryptocurrency, you might trigger a gain and must pay the tax on it. 

You can also acquire taxable Bitcoin income via capital gain. This is an example taken from the New York Times (Tara Siegel Bernard; 18 January 2018): “If you bought Bitcoin as an investment in late 2013, when it was trading at around $1,000, and used it to buy a car when the currency was trading at $18,000, you would have a long-term capital gain of $17,000.” That is, you will be required to pay tax on this capital gain. As an aside, note that more than 100,000 merchants around the world, including Microsoft, accept Bitcoin payment for their goods. Minted Bitcoin is pure income and will attract tax payment. Minting Bitcoin is the equivalence of printing dollars or Naira, though with the difference that, whereas the latter can only be done by the government, the former can be accomplished by individuals. This column has written extensively on the process of minting Bitcoin. For example, the 1 March 2017 article in this column focuses on this topic.

Some companies pay their employees’ salaries and compensations in Bitcoins. Obviously, these are taxable incomes.

For successful taxing of cryptocurrency income, the exchange houses will need to cooperate with the government. For example, they will eventually be required to provide the records for all customers who bought digital currency from the company for a given time period. Before this happens, you have to self-process and keep track of every transaction you make; to compute your gains and losses, so you can report them to the taxman at the end of the year.

Obviously, this creates a hole in the perceived anonymity of cryptocurrency, which is one quality that has attracted many of its traders. But then, for cryptocurrency transactions to survive long-term, there just has to be a way for the government to collect taxes on incomes derived from them.