Paper wallets are common ways of securing your cryptocurrency in a way that cannot be hacked. Keeping your bitcoins secured in a hard copy prevents anyone from using the internet or your computer to learn your key, making it more difficult to steal your investments. However, it doesn’t do anything to help save you on taxes. Understanding the taxability of paper wallet transactions requires understanding how and when bitcoin is taxed, in general. The California cryptocurrency tax lawyers at the NewPoint Law Group explain:
How is Bitcoin Taxed?
Bitcoin investments, whether in a paper record or digital, are all subject to tax. First, it is important to understand that, even though they use the word “currency” in the name, cryptocurrency is considered property, not money.
Bitcoin and other cryptocurrencies are taxed like stocks, as a form of property. This rule is always subject to change, but this is the IRS’ current view. Just like shares of stock, you buy cryptocurrency, then sell it later for a profit (or loss). The money that you pay into the investment is important because it sets your “cost basis.” When you later sell the coin, you compare what you sold it for to your cost basis to see whether you made a profit or suffered a loss. That profit (as opposed to the sale price) is taxable as income. Just like if you sold a piece of artwork or a stock, the government wants to know what profit you made, and the IRS wants a cut of it.
Since these items are held as property, they are usually taxed under the “capital gains” tax rate, as opposed to the rate you pay on your income taxes. Any property which can be held for more than a year and sold-off is considered a “capital asset.” This is held, tax-free, and can increase or decrease in value until you sell it. When you do sell it, the IRS wants to know whether you made a profit or a loss. Profits are taxable, but some losses can also be deducted from your overall taxes. The capital gains tax is often a different rate than you pay on your income taxes and is often a lower tax rate. However, if you receive crypto as payment for a job or services, its value must be reported as taxable income under your usual rate.
Talk to a tax attorney for help understanding when your bitcoin or other crypto transactions are taxable, and for assistance planning your taxes. Failing to file taxes for cryptocurrency transactions can lead to tax penalties or even criminal charges.
How Does the IRS Tax Paper Wallet Transactions?
Paper wallets are an interesting way to store Bitcoins. The entire purpose of Bitcoin is that it is a digital currency, attached to a specific code. This makes it very flexible and allows cryptocurrency to be its own digital currency that sits anywhere on the internet. However, anything on the internet is exposed to the risk of hacking or other issues.
Paper wallets take the digital risk out of digital currencies by converting the code to a code you physically print out. To make any online transactions with paper wallet funds, you have to convert them back to a digital wallet/software wallet, perform the transaction, then return any leftover funds back to a paper wallet. Converting the cryptocurrency from a paper wallet to a software wallet is not a transaction, and you do not gain any profit or sell any of your coins by doing this. That means that converting back and forth between a software and paper wallet is not usually a taxable transaction the IRS wants reported – at least not by current rules.
However, any sales you make involving your paper wallet are still taxable. If you convert your paper wallet funds to a software wallet because you want to sell the coins or use them to purchase something, that sale/purchase is taxable. Selling your coins means you realize a profit or loss, which must be reported to the IRS. If you didn’t receive currency but traded your coins for something else, you might still be taxed. The market value of your coins at the time of sale (or the value of the item you received) is compared to the cost basis (what you originally paid for the coins) to find your profit or loss.
Throughout the year, you may buy and sell bitcoin or use it to purchase other things through multiple transactions. Keeping a record of these transactions is vital since any sales or profits you make are taxable. But it is important to remember that there is no tax necessary until you realize the profit by selling your cryptocurrency, converting the coins to cash, or buying something else with them.
California Cryptocurrency Tax Lawyers Offer Free Consultations on Digital Currency Transactions
If you have investments in cryptocurrencies like Bitcoin, Litecoin, Ethereum, Dash, Ripple, or even Dogecoin, your transactions may be reportable to the IRS. Talk to the Roseville tax lawyers at the NewPoint Law Group today for a free consultation on your tax situation. Our number is 1-800-358-0305.