The Basics of Tax Filings and How Bitcoin Mining Helps to Legally Reduce Obligations
Disclosure: This article is part of VBit Technologies’ “Money Bit” where we educate our clients on matters Financial Literacy.
Two things are certain in life; death and taxes.
One of the hallmarks of adulthood in America, or any other country, is paying taxes. Many people know of this but little much else. Learning how to work the tax system is an essential part of financial literacy.
It doesn’t have to be the reserve of tax lawyers and accountants. The more you know about finance the easier it is to plan and build your way towards financial freedom. Filing taxes for the first time can seem tedious and complicated. However, once you learn the ropes it becomes routine like having coffee.
The manner in which you pay taxes varies depending on the form of employment you have. For those who are employees in an organization, it is typical for the employer to automatically pay a portion of your income in taxes.
For those with their own businesses, the onus to file taxes is on you. Because of the fact that states in the USA have different tax policies, this guide will take a mostly federal approach in analyzing these basics.
Filing Taxes 101
New employees normally have to fill a Form W-4 when you begin a new job. The information you give helps in calculating how much taxes you will pay. The usual time for filing taxes is around April 15. In 2020, the US government extended the deadline for filing taxes to July 15 because of the effects of Coronavirus on the American economy.
The American tax system is progressive. The higher your income is, the higher the amount of effective taxes you owe. This means that individuals fall in tax brackets. These brackets inform the level of tax for particular income levels. You calculate the total (gross) income for all your sources, claim any deductions you are entitled to, subtract from the gross, and there you have your taxable income.
You file a tax return every year to tabulate a final tally of your tax situation. Filing the return usually determines if you need to file additional taxes, or if you are owed a refund on taxes already paid. Your marital status also has an effect on your tax refund. The percentage you pay towards household expenses affects your filing status.
The deductions available change depending on legislation like the American tax cuts of 2017. It is always important to keep up with such developments.
Common Ways of Filing Returns
There are three common ways of filing returns:
- Manually completing the IRS Form 1040. Individuals fill this form and file it with any payment they owe. People who are self-employed and independent contractors fill a different form called Form 1099.
- Using a tax software program or websites that offer tax filing services. Such services ask you some questions based on your income and potential deductions, and then file your 1040 electronically at a small fee.
- Utilizing the services of a professional accountant or tax expert. Hiring such an individual makes sense if you have a sizable income/business and are trying to get the most refunds available.
The third option is obviously more costly. However, the input of a tax lawyer or accountant who knows the tax code like the back of their hand can outweigh this cost.
This is why corporations and high net worth individuals end up with lower tax bills. Utilizing every rebate and relief available can make a massive difference in the amount of taxes you owe.
Utilizing Tax Deductions
Can you have the best of both worlds? Filing your own taxes while utilizing these deductions and reliefs? The answer is yes.
Unfortunately, most people don’t take time to study the tax laws to make informed tax strategies. In the recent Coronavirus CARES Act, there was a largely unnoticed provision that expanded distribution options and favorable tax treatment for up to $100,000 that individuals may borrow from their 401k accounts. Previously, early withdrawal would see you slapped with a 10 percent tax.
Such reliefs are something you won’t find on the headlines. With politicians bickering and analysts focused on macroeconomic data, such details are often missed. Therefore, it is always useful to research tax legislation because you never know how much you could save up in deductions until you actually look up information.
In the course of doing research, you will come across some ingenious ways of reducing your tax obligations. One such method is using Bitcoin mining to cut your taxes.
Bitcoin Mining to Reduce Taxes
Instead of flagrantly evading taxes, you can work within the IRS code to actually benefit from the rules. Now you may think, what in the world could Bitcoin mining have to do with taxes?
For starters, Bitcoin was the first decentralized currency in the world. The currency has grown in value gradually as is now worth almost $10,000. Because of this rapid appreciation, Bitcoin first gained credence as a speculative asset and then a store-of-value asset for investors.
The IRS classifies Bitcoin as property and Bitcoin mining as a business. These classifications mean that you can take advantage of available deductions for enterprises that fall under this category.
Before going into the taxes, let’s first determine Bitcoin taxable events. These are Bitcoin transactions you have to report for tax purposes. Taxable events include payment for goods/services, payment or salary earned in Bitcoins, and Bitcoin mining.
Moreover, capital gains taxes are applicable on proceeds from trading Bitcoin and gains from Bitcoins you hold that appreciate in value. Capital gains are taxes you pay from your investments and are usually less than income taxes.
Now, here comes the important bit:
You file Bitcoin taxes under Section C of your Form 1040. This section is for activities you do as a sole-proprietor that Bitcoin mining falls under. Filing your mining income under Section C makes you eligible for certain tax deductions.
You can use the cost of Bitcoin mining equipment, for instance, to offset some of the tax due on your Bitcoin mining profits. That comes under the Section 179 deduction. You can deduct the cost of Bitcoin mining equipment, though not 100 percent to reduce your taxes. Similarly, the Bonus appreciation deduction allows for the deduction of such machinery related expenditure.
One can purchase Bitcoin mining equipment and and make money from mining. When filing your tax returns, add your income to the amount you have made from Bitcoin mining, utilize deductions like the Section 179 deduction, and the Bonus appreciation deduction to reduce your tax liability. Calculate the tax due with the deductions available and you will find that the total amount you file in taxes is lower than filing regular income tax.
For more details read through these sections of the IRS code. If you can get the advice of a tax professional before implementing it, that is even better.
Mine with VBit Technologies to Actualize These Deductions
Bitcoin mining may help you reduce your tax burden, but it has logistics that make it difficult to conduct solo. This activity consumes a crazy amount of power and produces lots of heat. There is a need for cheap power and cooling.
VBit Technologies provides such facilities for prospective miners. VBit is an equipment reseller that provides hosting services for users seeking to use Bitcoin mining to reduce their tax obligations. With data centers located in areas with natural cooling and cheap renewable power, Bitcoin mining is simpler partnering with VBit Technologies.
Sign up with VBit Technologies today, and offset some of your taxes with Bitcoin mining!