With the advent of digital technology in all domains and industries, it was only a matter of time before payment of all types shifted online as well. Online banking, payment apps on smartphones, and credit card transfers are all examples of digital payment. Of late, another exciting and new industry that has arisen in the sphere of digital currencies is that of bitcoin.
Before we get into Robinhood Tax and the platform details, let’s take a brief look at the details of Bitcoin.
What is Bitcoin?
Bitcoin is a digital currency that is decentralized i.e., banks or governments do not issue them. Bitcoin is created, distributed, and traded with the help of a ledger system called a blockchain. Bitcoins are not legal tender; it is accepted as a form of payment in several places as long as they have a bitcoin merchant tool.
Investing in bitcoins
Bitcoins can be exchanged for fiat currency as well, and hence, there is a potential to invest in bitcoins. In 2014, the Internal Revenue Service (IRS)brought about a rule stating that all virtual currencies, including bitcoin, will be taxed as property rather than as a currency. Therefore, every bitcoin trader must keep track of transactions and comply with the tax code.
Taxes on bitcoin
All the bitcoins traded with other parties, and those used to purchase or sell goods are all taxable transactions. Any profit or loss you gain from bitcoin transactions come under capital gains and losses, and you are taxed depending on the tax bracket. Buying a bitcoin using traditional money is not taxable, as are transferring bitcoins between wallets or transferring them as gifts (but within the gift tax exemption limit).
Bitcoin taxes can be quite confusing, primarily if you use it in different types of transactions. However, there are several online services and free bitcoin tax calculator that help you file and calculate crypto taxes.
Robinhood Platform and Tax
Robinhood has become one of the hottest platforms for today’s generation to trade and invest in a variety of assets, including cryptocurrencies like bitcoin. However, due to certain factors discussed below, we shall see that tax reporting for Robinhood is much different compared to that of other cryptocurrency exchanges like Coinbase or Gemini.
What makes Robinhood Tax different?
The Robinhood platform restricts the transfer of cryptocurrency in and out of the platform. You can trade bitcoins and other cryptocurrencies only on this platform and cannot transfer them from or to your external wallet. Since no transaction happens outside the platform, Robinhood can track every single buy and sell and trade of your cryptocurrency.
The 1099-B form
With the data of every transaction you have done on the platform, Robinhood can give the complete report of gains and losses to its users in a form called 1099-B. Most other cryptocurrency exchanges cannot do this, and hence, they cannot give users accurate tax reports either. You just need to file your crypto taxes to upload this form into a tax-filing software; you do not have to track, search, and type in all your transactions because Robinhood does that for you.
The issue with multiple exchanges
If you trade on various cryptocurrency exchanges, including Robinhood, you need to aggregate all transactions across the different platforms when filing taxes. Online crypto tax-filing applications can pull together separate transactions, but ensure the Robinhood transactions are included separately since the 1099-B form is complete on its own. That way, robinhood tax filing is relatively more straightforward.
Effects of Robinhood Tax on the bitcoin industry
Accurate tax reports
Remember, the main difference about the Robinhood platform is that it bans the transfer of cryptocurrency in and out of the platform. In other cryptocurrency exchanges, the platform has no way of knowing from where you got cryptocurrencies or where they go once you transfer to an external wallet. This means that a lot of people dealing with crypto trades have to keep track themselves and not rely on the platforms to do it.
Bitcoin, being a decentralized system, has the inherent risk that transactions cannot be regulated, and hence, there is scope for money laundering and tax evasion. With Robinhood keeping a clear track of every transaction you make, tax filing is straightforward.
Taxes affect bitcoin prices
Cryptocurrency taxes are likely to have a detrimental effect on the price of bitcoin. Investors indulge in massive sell-offs to reduce their tax liabilities, and cryptocurrency exchanges are significant contributors to the selloffs because most of their working capital is in the form of bitcoin or ethereum.
With cryptocurrency being used to pay off tax liabilities, once again, there is the issue of proper tax filing for the cryptocurrency, including the task of classifying which transactions are taxable.
Cashing out of crypto and other purchases
As discussed earlier, bitcoin is being accepted as a mode of payment for many products and services. This, of course, means that your platform allows conversion of bitcoin to fiat money and also to use it as payment.
There are many parameters to be considered when using bitcoins for purchase of items like the rate of the basic price of the bitcoin when you got it, the price of the item, and the basic price of bitcoin when you use it to buy the item.
A “de minimis election” allows taxpayers to exclude an amount up to $200 for every transaction of foreign currency exchange rate gain if they gained from personal purchases. However, if the investor is also trading coins in parallel and frequently, it becomes a mess to keep track.
The Robinhood platform’s restriction to stick to the platform limits the use of cryptocurrency for purchases and other purposes, but it saves a lot of time and effort in filing your taxes right. As bitcoin becomes more popular, the IRS and governments will tighten the leash on illegal transactions and tax evasions, so it is useful to have an organized list of all transactions. Remember that you can always trade on multiple platforms for multiple purposes as long as you keep track of using the aid of tax-filing software online.