Over the past few years, Bitcoin ATMs have grown significantly in Texas. As of October 10, 2023, Texas has 4,094 Bitcoin ATMs, making it the top state for Bitcoin ATMs in the U.S., even ahead of California, which has over 3,600 ATMs. While many of these ATMs are in large cities like Houston, Austin, and Dallas, they’re also found in smaller towns across the state, giving most Texans easy access to buy and sell Bitcoin.
With more people using Bitcoin ATMs, it’s essential to understand the tax rules that come with these transactions. Every time you buy or sell Bitcoin at an ATM, it could affect your taxes. Not knowing or ignoring these rules might lead to problems during tax time. Bitcoin ATM users must stay informed and make intelligent decisions.
Bitcoin ATM Overview
Bitcoin ATMs, often called BTMs, are physical machines that allow individuals to buy and, in some cases, sell Bitcoin using cash or debit cards. Much like traditional ATMs, which dispense fiat currencies, Bitcoin ATMs offer a touchpoint for users to interact with the digital currency realm. The primary purpose of these ATMs is to provide a convenient and relatively instant way for people to buy Bitcoin without the need for online exchanges, thereby bridging the gap between digital currencies and the physical world.
Texas has witnessed a notable increase in Bitcoin ATMs over the years. Starting with just a handful a few years ago, the state now houses over 4,000 of these machines. Several factors have contributed to this growth. Firstly, the general rise in the acceptance and use of cryptocurrencies has played a significant role. Secondly, Texas’s open approach to emerging technologies and businesses has created an environment conducive to the proliferation of Bitcoin ATMs. As a result, both local and national BTM operators have seen Texas as an attractive location to expand their operations.
The primary users of Bitcoin ATMs in Texas comprise a mix of cryptocurrency enthusiasts, investors, and everyday individuals looking for an easy way to enter the world of digital currencies. For many, the simplicity of using a BTM, as opposed to navigating the sometimes complex world of online exchanges, is a significant draw.
Additionally, Bitcoin ATMs cater to those without access to traditional banking systems, providing them an avenue to participate in the digital economy. The fact that these machines are now available not just in urban centers but also in smaller towns makes them accessible to a broad swath of the Texas population, further enhancing their appeal.
Cryptocurrency Tax Basics
In taxation, the way cryptocurrency is classified has significant implications. The U.S. Internal Revenue Service (IRS) views cryptocurrencies, including Bitcoin, as property rather than currency. This means that, for tax purposes, transactions involving cryptocurrencies are treated similarly to transactions involving other forms of property, like stocks or real estate. Consequently, when you sell, trade, or use cryptocurrency to purchase goods or services, you may realize a capital gain or loss, which could be taxable. Unlike traditional currency transactions, which typically don’t generate tax events (except in cases of foreign currency trades), almost every transfer or exchange of cryptocurrency can have tax consequences.
Capital gains tax comes into play when a cryptocurrency is sold or traded and a profit is made. The amount of tax owed depends on how long the cryptocurrency was held:
Short-term Capital Gains: If you sell or trade a cryptocurrency you’ve held for one year or less, any profit is considered a short-term capital gain. This type of gain is taxed at your ordinary income tax rate, which varies based on your annual income.
Long-term Capital Gains: If you sell or trade a cryptocurrency after holding it for over a year, any profit is categorized as a long-term capital gain. These gains typically benefit from more favorable tax rates, which, as of current tax laws, can be 0%, 15%, or 20%, depending on your taxable income and filing status.
The distinction between short-term and long-term is crucial since it can significantly impact the tax you owe.
Maintaining thorough records of cryptocurrency transactions is essential for several reasons:
Determining Tax Liability: Detailed records help accurately calculate capital gains or losses during tax filing.
Having records that indicate the purchase date and amount can be invaluable, especially when distinguishing between short-term and long-term holdings.
In an IRS audit, comprehensive records can be the difference between a smooth process and potential penalties.
Specific Tax Implications for Bitcoin ATM Transactions
Purchasing Bitcoin with U.S. dollars or other fiat currencies at a Bitcoin ATM is not taxable. The tax obligation arises when you later sell or transact with that Bitcoin.
The cost basis of your Bitcoin is the amount you spent to acquire it, including any fees. For instance, if you buy Bitcoin for $100 and pay a $5 fee at the ATM, your cost basis is $105. This figure is essential for determining gains or losses when using or selling Bitcoin.
When buying Bitcoin, record the date of purchase, the amount spent, the quantity of Bitcoin received, and any associated fees. This information is vital for calculating your tax liability in the future.
When you sell Bitcoin, you’ll need to determine if you made a profit (gain) or sold it for less than you bought it (loss). This is done by subtracting your cost basis from the sale price. You have a capital gain if you sell the Bitcoin for more than your cost basis. If you sell for less, you have a capital loss.
Any gain or loss from selling Bitcoin must be reported on your tax return. Depending on the duration you held the Bitcoin before selling, this will be categorized as either a short-term or long-term capital gain or loss.
Receiving Bitcoin as Payment:
If you receive Bitcoin as payment for goods or services, you must report the income based on the fair market value of the Bitcoin at the time of receipt. When you later sell or use, this becomes your cost basis for the Bitcoin.
It’s crucial to differentiate transactions related to business from personal ones. For businesses, Bitcoin received as payment can be considered revenue and may be subject to additional tax implications, such as self-employment tax.
When you send Bitcoin to someone else, you must determine whether it’s a gift or a sale. If you’re not receiving anything in return, it’s likely a gift. If you’re exchanging Bitcoin for goods, services, or money, it’s a sale.
You won’t immediately owe any taxes if you gift Bitcoin. However, if the recipient later sells the Bitcoin, they might owe taxes based on the cost basis from when you initially acquired it.
Sending Bitcoin as part of a sale or exchange creates a taxable event. You’ll need to determine if there’s a capital gain or loss based on the difference between your cost basis and the fair market value at the time of the transaction.
Texas Specific Tax Scenarios Involving Bitcoin ATMs
A Texan purchasing Bitcoin to hold as an investment:
When a Texan buys Bitcoin as an investment via an ATM, there’s no immediate tax implication. The purchase itself isn’t a taxable event. However, the cost basis—the amount spent, including fees—should be recorded accurately. Taxes will come into play when the Bitcoin is later sold or used. If the value of the Bitcoin has increased when it is sold or spent, the Texan will owe capital gains tax on the profit. Conversely, if sold for less than the purchase price, they might have a capital loss, which could be used to offset other capital gains.
A local Texas merchant receiving Bitcoin as payment:
A merchant in Texas accepting Bitcoin for goods or services needs to report the transaction as income. The income should be valued at the fair market value of the Bitcoin at the time of the transaction. This value will also serve as the cost basis for the merchant if they later decide to sell the Bitcoin. The merchant needs to maintain detailed records of such transactions for tax purposes and to comply with local or state business regulations.
A Texas resident gifting Bitcoin to a family member or friend:
When a Texan gifts Bitcoin, there are no immediate taxes due by the giver. However, the recipient inherits the original cost basis and holding period of the Bitcoin. If the recipient later sells the Bitcoin, they will owe taxes based on the difference between the sale price and the inherited cost basis. It’s also important to note that if the gift’s value exceeds the annual gift exclusion amount (as of the last update, $15,000 per person per year, but this can change), the giver might need to file a gift tax return. However, they may not necessarily owe gift tax due to lifetime exemption amounts.
An individual converting Bitcoin to fiat at an ATM:
When a Texas resident converts Bitcoin to U.S. dollars or another fiat currency at a Bitcoin ATM, it’s considered a sale, creating a taxable event. The individual will need to determine any capital gain or loss. This is calculated by subtracting the original cost basis of the Bitcoin from the amount received in fiat currency. Any profits will be subject to capital gains tax, while losses can be used to offset other capital gains. Proper record-keeping is essential, including tracking the date, amount, and the Bitcoin’s value at the time of conversion.
Potential Tax Benefits and Deductions
Declaring losses and how to report them:
Cryptocurrency, like other investments, can increase or decrease in value. You have incurred a capital loss if you sell or use Bitcoin for less than you acquired it. Fortunately, these losses can help offset other capital gains and reduce your taxable income:
All capital gains and losses from Bitcoin and other cryptocurrencies should be reported on Form 8949, which feeds into Schedule D of the individual tax return. Here, you’ll detail each transaction, including the date acquired, sold, the sale price, and the cost basis.
Capital losses can offset capital gains of the same type (short-term with short-term, long-term with long-term), and any excess loss can offset the other kind of gain.
Suppose there are still capital losses remaining after offsetting all capital gains. In that case, you can use up to $3,000 of these losses (or $1,500 if married filing separately) to reduce your ordinary taxable income.
Losses exceeding the annual limit can be carried forward to future years until fully utilized.
Strategies to minimize tax implications:
Given the potentially lower tax rates on long-term capital gains, consider holding Bitcoin for over a year before selling or using it.
If considering helping someone else get into the Bitcoin market, gifting Bitcoin might be more tax-efficient than selling and giving cash, though always consider the gift tax implications.
If you have investments that have lost value, consider selling them to realize a capital loss, which can offset capital gains.
Some innovative platforms and financial products might allow cryptocurrency investments within tax-advantaged accounts like IRAs. Consider these options if they fit your investment strategy.
For the most accurate and up-to-date information, it’s always advisable to consult with a Texas-based tax professional or accountant who can provide guidance tailored to individual circumstances.
Reporting and Compliance
IRS Form 8949 and Schedule D:
IRS Form 8949 reports sales and dispositions of capital assets, including transactions involving Bitcoin and other cryptocurrencies.
- Part I deals with short-term transactions, whereas Part II is for long-term transactions.
- For each transaction, you need to report the date of acquisition, the date of sale or disposition, the sale price, and the cost basis.
This attachment to your principal tax return (Form 1040) summarizes capital gains and losses from all sources, not just cryptocurrencies.
- Information from Form 8949 will feed into Part I (short-term) and Part II (long-term) of Schedule D.
- Here, you’ll calculate the year’s net capital gain or loss.
Reporting deadlines and penalties for non-compliance:
Cryptocurrency transactions are typically reported annually with your regular tax return. For most individual taxpayers, the deadline is April 15th of the year following the transaction year.
If you need more time to prepare your return, you can request an extension, but any tax owed is still due by the original deadline to avoid penalties and interest.
Failure to report gains from Bitcoin or other cryptocurrencies can result in a variety of penalties:
- Failure-to-file penalty: This is usually 5% of the unpaid tax required to be reported, accruing for every month or part of the month the return is late.
- Failure-to-pay penalty: This accrues at 0.5% per month on the amount of tax unpaid by the due date.
- Accuracy-related penalties: These can be as much as 20% of the underpayment amount.
In addition to penalties, the IRS charges interest on unpaid taxes.
Tax professionals and software in assisting with crypto-related taxes:
Given the complexity of crypto taxation, it’s advisable for those with significant transactions or unique situations to consult with tax professionals familiar with cryptocurrency reporting specifics. They can provide clarity on nuanced situations and offer strategic tax-planning advice.
Several tax software solutions now offer integrations for cryptocurrency transactions. They can help automate the process by:
- Importing transaction data directly from exchanges or wallets.
- Calculating gains and losses.
- Filling out the necessary tax forms.
Common Mistakes and How to Avoid Them
People mistakenly believe that if a transaction is small, it doesn’t need to be reported. However, the IRS requires reporting all transactions, no matter how minor.
Make it a habit to record every transaction, regardless of its size. Use dedicated crypto-tracking apps or software to help streamline this process. Periodically, check your recorded transactions against your wallet and exchange histories to ensure no transactions have been missed.
Misunderstanding the nature of a transaction (e.g., mistaking a sale for a gift):
Misclassifying transactions can lead to incorrect reporting, which might result in either overpaying taxes or facing penalties for underreporting.
Familiarize yourself with the specific definitions and tax implications of various transaction types. Whenever you perform a transaction, note the nature and purpose of the transaction. For instance, if you’re gifting Bitcoin, clearly state that at the time of the transaction.
If you need clarification on the nature of a transaction, consult with a tax professional or refer to IRS guidelines.
Failing to account for fees associated with Bitcoin ATM transactions:
Bitcoin ATMs often charge fees for buying or selling Bitcoin. Not accounting for these fees can distort the actual cost basis or the proceeds from a sale, leading to incorrect tax calculations.
When purchasing Bitcoin, add any fees to the purchase price. This increases your cost basis, potentially reducing capital gains when you sell. When selling Bitcoin, subtract any fees from the sale price. This will give an accurate reflection of your proceeds.
Always retain any receipts or transaction records from Bitcoin ATMs. These can prove the exact amounts and fees associated with each transaction.
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