Understanding Capital Gains When Spending Bitcoin

Hey everyone, I've been digging into this topic for a few days now, but with work and life getting in the way, I haven't had much time to really wrap my head around it. I'm hoping someone here can shed some light on this. So, if I got it right, capital gains tax kicks in when you sell your crypto since that's when you actually realize those gains, and you gotta report that as income according to your local tax rules. My question is, if someone spends their Bitcoin to buy stuff, does that count as a realized gain before they make the purchase? Sorry if this is a boring or well-trodden subject for the more experienced folks, but I’d appreciate any simple explanations or links to where I can read more on my own. Thanks a lot!

As far as my understanding goes, this can simplified in two groups. Group 1 - you convert the bitcoin to fiat money. You will have to show capital gains and have to pay the taxes. What you do next with your money is none of their tax department's concern. Group 2 - you pay the services or buy the goods in bitcoin and there is no fiat money involved, in this case no taxes. The problem will arise when the tax department understands that you are spending far more than what you actually earn. Then the problem will start and you might have to show your source of income. This is as far as I understand, I am not a CA and I would be willing to hear from experts here in order to enrich my own knowledge.

Great question! You suggest a good idea. I buy a shitcoin for $1,000 and it grows 100 times. I don't want to pay taxes and buy an expensive car worth $100,000 for this shitcoin. As a result, I have a great profit in the form of an expensive car for $1,000 without taxes. Are you serious? Everyone would do this if it were possible. __ The correct answer says that when buying goods, you must take into account the price of the cryptocurrency at the time of purchase and pay taxes.

If I consider my country's law, I will have to pay capital gains tax on the scenario you have given. The price that you pay to buy the products or services minus your investment amount, will be considered as your capital gain. I am not sure which country you live in, but I will have to pay capital gains tax in my country as per the local law. Otherwise you can imagine the amount of products and services will be purchased by people to avoid capital gains tax! Simply doesn't make sense to the government.

I see, like I said in my previous post, I am not conversant with spending bitcoin being a hodler, hence my knowledge in this section is lacking. That thought did not cross my head when writing my previous reply, that a person could spend the coin after its value increases to buy something even costlier. I see now, however a lot of questions do come up here. Many people get their coins from exchanges, from exchanging other coins. Then they use that coin to buy something. Which metric to use as standard to compare the price then?

It's a good question, but traders have been trading on exchanges for a long time, selling and buying assets in different trading pairs and paying taxes without problems. Some crypto exchanges even have services for uploading all trades and preparing tax returns. If you buy goods from the exchange account, you will complicate the process of filling out the tax return. It is easier to buy goods with fiat money or have an additional wallet, which you do not declare, to buy services on the Internet.

If you're a Salvadorian, I can't answer because this country accept Bitcoin as legal tender, so you can pay directly using Bitcoin. But if you're not a Salvadorian, the capital gains will apply because when you buy something using Bitcoin, you're not directly spend it. Instead you're using third party, it will convert your coins to fiat (technically you sell your coins to fiat). So the process is BTC > fiat > seller's account. The capital gains can be calculated using blockchair, since this explorer show the USD value when you receive the coins, not based on today price.

All custodial services work on this principle and even private businesses are forced to work on this principle. Hence the question arises, why do we need bitcoin in this payment chain if we can pay with fiat money? Bitcoin gives us freedom and independence from custodial intermediaries, and we give our bitcoins to custodial organizations to convert our bitcoins into fiat and provide processing payment? Why??

Your question relies on your country crypto taxation. We have different rules but crypto is considered as subjected to capital gain tax if your country regulates crypto. In my country,  there’s no clear guidelines about crypto taxation that’s why crypto has no tax bit according to my accountant I should pay capital gain tax if I will be honest with the law since I’m gaining something from my crypto. If your country doesn’t have crypto taxation, it’s up to you if you will be honest or not on paying taxes.

As I understand it, capital gains tax is triggered when you sell your coins because the gains are realized, making it an income source that must be reported and taxed according to your local laws. My question is, if someone uses their BTC to purchase goods or services, is that considered a realized gain before the purchase of the product? I apologize if this topic has been covered extensively or seems repetitive, <a href="https://www.titos.site/">moturatna</a> but feel free to explain it simply (ELI5), or if you have the time, I would appreciate any resources or links that can help me research this further and save you the effort. Thanks in advance!"

I don't know the legal norms in your country. According to the general taxation rule, if cryptocurrency is subject to capital gains tax in your country, then when you buy goods for cryptocurrency, you technically exchange cryptocurrency for fiat and make a purchase. Further, in each legislation there are deductions or amounts that are not subject to tax. Also, in some countries there are nuances where the tax is calculated from the time of ownership of the cryptocurrency. Therefore, if you make large purchases, you need to consult a tax lawyer in your region, state, because there are also local tax laws in the country.

In El Salvador where Bitcoin is officially accepted as legal tender, you're right to spend your coins directly without need to convert the coins to fiat. In this case, Bitcoin treated as a currency, just like fiat as a currency, the gains should not be taxed. In this case, you should ask those people who keep demand and support Bitcoin to be accepted as legal tender, because they should have the answer. I'm not one who support Bitcoin to be accepted as legal tender, I only support Bitcoin shouldn't be banned because in order to own Bitcoin, it don't have to be accepted as commodity, property or currency.

Since zasad@ has the right idea, I think I'll explain it better. Generally for the treasury of your country, paying with Bitcoin is the same as selling Bitcoin. Don't listen to TheUltraElite. Selling Bitcoin creates a taxable event, just like paying with it. What happens is that some people may be tempted to pay directly without reporting to the tax authorities, but the legal obligation is there. I have been in places where you can pay for food with Bitcoin or a cab with Bitcoin. Since no place is KYC, there are people who can pay without Bitcoin without reporting it but if you pay with Bitcoin and don't report it, which is like selling and not reporting it, you can get fined if you get caught. That's in general, as for nuisances:

What is a bitcoin wallet in El Salvador? It's a custodial wallet, right? If it's a custodial wallet with KYC, why do I need it? It's the same as a crypto exchange custodia wallet with internal transactions that aren't in the blockchain.

As mentioned above, only consultation with a lawyer will save you. But, anyway, it’s always better to play honestly and give a small percentage to the big guy (to avoid ending up in Azkaban).

It depends on your country, period. Most countries, including the US, tax you on every exchange - not just when you cash out. Say you bought BTC at $10k and  exchange for ETH today when the BTC is worth $60k. You’ll have a $50k capital gain even though you don’t have any cash. This is true also for purchase. Say you use BTC to buy a car, with the same values as above.  You’ll have a $50k capital gain on the purchase of the car. When you file your taxes after the end of the year (in the US) you’d report the gain and pay taxes.

Now, I'm wondering, if you continue with your example. I bought bitcoin for 10 thousand dollars, then for this bitcoin I bought NFT token worth 50 thousand dollars. ( My profit is 40000 dollars ) Then I sold that NFT token for 10,000 dollars. ( My loss is 40000 dollars ) I have experience with tax returns and I understand that I can only report a certain amount of loss in a tax period and I will still pay tax, but how does this work in practice?

Bitcoin is generally referred to as a digital currency, meaning that legally if you have Bitcoin it is not realized as profit, you can buy goods or sell goods with BTC without having to say it is profit, even though your country applies taxes, profits and taxes are different factors, meaning taxes are taken from crypto buying/selling transactions on the exchange, if you buy goods through a different route, it's the same as sending BTC to a wallet or exchange, not in a crypto buying/selling transaction. I mean like this. You carry out crypto buying/selling activities on an exchange monitored by the tax authorities. For registered exchanges, of course all forms of crypto buying/selling activities are considered profits, so you are still subject to tax. If you send from wallet to wallet it is called a sending transaction, not selling/buying crypto, so it is not profit, but sending.

Capital gains and losses in the same year are netted against each other. So if you had a $40k gain (profit), then have a $40k loss in the same year, you’d net to $0 gains. Capital losses can be carried forward to future years, but not carried backwards.

It's very good that there is no limit on losses and now I know a way to make the government owe me money If my country had such laws, all traders would get rid of their profits like this.