Investment styles may come and go but the taxman will always be there ready to share in your wealth. As Bitcoin and other block chain investments have attracted lots of attention, there is an inevitable question I get during tax season: If my Bitcoin investment climbs, what will I pay in taxes?
Bitcoin has been around since 2009. Before 2011, Bitcoin value bounced around in the spare change range: $0.05 to $1. During 2011 it “soared” to nearly $20 before it then fell back to under $5 by the end of 2011. By 2013 a Bitcoin could be bought for somewhere between $100 and $300. To see a chart of Bitcoin values and historical events, check this link to 99Bitcoins.com.
What You Will Pay in Taxes for Your Bitcoin Gains
Let’s say that you’ve been making about $50,000 per year but you were one of the first to see the potential of Bitcoin when it was first introduced. So, you scrounged around the house and came up with some pocket change or money you found in between the sofa cushions. Your investment in Bitcoin may have been a mere fifty dollars if you were lucky enough to buy in back in March 2013. In tax terms, that’s what we call your basis. Capital gains (and losses) are figured as the difference between what you realize upon sale and what you paid when you got into the investment.
Now what would happen if that one Bitcoin you bought in March 2013 at about $50 soared to $100,000?
A lot depends on your tax bracket, your tax filing status (married versus single versus head of household), and how long you owned that Bitcoin.
Let’s say you’ve earned less that $50,000 per year. Under the old tax law, you’d be in a pretty low tax bracket with a marginal rate of 15%. Effective for tax year 2018, you’ll be in the new, lower 12% tax bracket. For investors in these brackets, long-term investment gains for investments held for longer than one year have a capital gains tax of 0%.
If you’re in this tax bracket and have owned that Bitcoin since 2013 and sell when it hits $100,000 with a $$99,950 profit, you’d be in the same 0% capital gains tax bracket.
Congratulations, you’ve won the lottery. All things being equal, the short answer to the question about taxes is that you’d probably owe $0 in taxes. But tax laws and brackets could change. But assuming that they don’t you’ll likely have no capital gain to tax.
The new law retains the previous law’s maximum tax rates on net capital gains and qualified dividends (0%, 15%, and 20%) for those who fall into the lowest two brackets. The thresholds for the brackets will depend on your filing status (married filing jointly, married filing separately, filing as a single taxpayer). So, if your combined adjusted gross income is at or below $77,000 for joint filers or $38,500 for single filers, then you’ll likely fall into one of the two lowest tax brackets qualifying for the 0% capital gain formula.
To qualify for this special capital gains tax rate, you’d have to be sure to stay under these thresholds. If your investment was soaring, you may be tempted to quit your job to save on taxes. But don’t take that leap just yet.
Now, whether or not you have any gain from a speculative investment is an entirely separate matter. After peaking at nearly $19,000 per Bitcoin in mid-December 2017, the value has dropped back to about $8,200 on February 12, 2018.
If you’re looking for a more integrated look at how your investments will impact your tax bill, reach out to Steve Stanganelli at Clear View Wealth Advisors / Boston Tax Planners.