Bitcoin Billionaires Beware

Dear Reader,

They say there are only two things certain in life: death and taxes. And nobody likes either of them. 

But tax season is upon us and that always means a deluge of tax advice. Unfortunately, most of it is futile and lightweight. I say that because most people work for their money rather than have their money work for them. The problem with working for your money is that you pay more in taxes as your income goes up.

Working hard to earn more money and then giving it away in higher taxes isn’t financially intelligent. On the other hand, making your money work hard for you means your earnings are taxed less, if at all.

Years ago, my rich dad told me, “When it comes to taxes, the rich make the rules.” He also said, “If you want to be rich, you need to play by the rules of the rich.” The rules of money are skewed in favor of the rich, and against the working and middle classes. After all, someone has to pay taxes.

With the invention of Bitcoin, we are now seeing a historical event that will never be repeated. Bitcoin’s characteristics make it a direct competitor to the central banks and now that the Internal Revenue Service is fully aware of this alternate currency, it’s doing everything in its power to put its hand in the cookie jar. 

This letter is for all those Bitcoin “billionaires” who’ve realized huge gains over the last year with their Bitcoin purchases… You still have to play by the rules of the rich if you want to avoid paying taxes like the poor. 

Familiarize Yourself with the Different Types of Income

In every country, there are different types of income, and they all have different associated tax rates, costs, and benefits.

#1  Earned income: If you are an employee, a self-employed individual, or a partner, you make your money through earned income. Earned income is taxed at the highest rate possible.

In an attempt to make things even between the different tiers of society, the government has set up varying levels of how much people will pay in taxes.

Tax brackets, as they are called, tax people within each bracket at different percentages. For example, in the United States, if you make under $9,525 per year, your tax rate is 10% of your taxable income. If you make between $9,526 and $38,700 per year, your tax rate is 12%. There are varying tax brackets all the way up to individuals that make up to $500,000 per year, who are taxed at a high 37%.

#2  Portfolio income: Where earned income is acquired by exchanging time for money, portfolio income is made through capital gains.

Unlike ordinary earned income, portfolio income is a tax on how much money you made on the sale of your asset. The tax rate is determined by how long you held the investment and how much income you made during the tax year.

For instance, if you owned a rental property for more than a year and decided to sell it, you would be taxed anywhere from 0% to 20%. This would be called a long-term capital gains tax.

There is also short-term capital gains tax (taxes applied to profits from selling an asset you held for less than a year) and property sales tax which are governed by their own set of rules.

#3  Passive Income: Generally derived from real estate, royalties, and distributions. It is the lowest-taxed income, with many tax benefits, and is the easiest income to build wealth with thanks to its combination of low taxes and potentially infinite returns.

One of the reasons my rich dad encouraged me to invest for passive income is because of the amazing tax benefits it provides.

Passive income is taxed at the lowest rate of the three types of income.

For example, if I own a rental property, I make passive income every month. Not only do I make money through rent, but the passive income I put in my pocket is taxed at a very low rate, if at all.

The point is this: not all income is created equal. Passive income, the kind of income generated on the right side of the quadrant is much better than earned income, the kind earned on the left side of the quadrant. Passive income is taxed less, and it’s also a result of cash-flowing assets, not selling your time as an employee.

Cryptocurrency and Taxes

In 2014, the IRS issued Notice 2014-21 explaining that virtual currency is treated as property for Federal income tax purposes. Recently, I interviewed Tom Wheelwright, my Rich Dad Advisor on taxes for The Rich Dad Radio Show so he could explain, how cryptocurrencies are impacted by the tax code.

Tom shared in the podcast, “According to the notice, anytime someone uses or trades virtual currency, it is a taxable transaction. The same thing would happen if you went and used silver or gold to buy something, that would be a taxable transaction, too.”

Most people think that since Bitcoin and other cryptocurrencies are outside of the system, they’re not subject to the tax laws but Tom warned, “Many people talk about the benefits of Bitcoin being outside the system. While it is for now, outside the banking system, it is far from being outside the tax system. For now, the IRS treats Bitcoin and other cryptocurrencies like Ethereum as a commodity, not currency.” 

Simply, purchasing cryptocurrency with cash and holding on to it isn’t a taxable transaction, but selling, exchanging, or using it to purchase goods and services is.

How Bitcoin Is Taxed

According to Tom, “Under the tax law, commodities are simply property. If you sell a commodity, you pay tax on the difference between your purchase price and your sale price. If you hold the commodity for investment and for more than 12 months, you are taxed on long-term capital gains rates. If you hold the commodity for investment and sell it sooner than 12 months after you purchased it, you are taxed at short-term capital gains rates, which in the U.S. are taxed at the same rate as ordinary income.”

If for example, you use Bitcoin to purchase a product like Tesla, under the Internal Revenue Code, you are taxed any time you “sell or exchange” one asset for another. According to Tom, you’d be exchanging Bitcoin for Tesla, and therefore it creates a taxable transaction. Your tax is based on the difference between the price you paid for the Bitcoin and the value of the car. Tesla’s tax is based on the difference between the cost of manufacturing the car and the value of the Bitcoin received. 

Bitcoin Mining

For tax purposes, mining Bitcoin counts as part of your regular taxable income. An article in Forbes clarifies the tax liability by saying, “You owe tax on the entire value of the crypto on the day you received it, at your regular income tax rate. And if you hold the same cryptocurrency you mined or earned from these activities, its value increases, and you either spend it or sell later at a profit, you would also owe capital gains taxes on the profits, based on how long you’ve held it.”

Unlike receiving a W-2 from an employer or 1099 if you are an independent contractor, mining is a unique situation because there is not employer reporting the income. This means that the income one would earn from mining must be voluntarily reported. 

The good news is that mining is most like self-employment income and there may be benefits that are afforded to other small businesses. Of course, you’ll want to consult a professional tax advisor for any questions you might have. 

Tom says, “Bitcoin mining is like any other mining business. It’s a business. Expenses for mining should be deductible, and investments in computer equipment should be allowed bonus depreciation. In addition, most miners are passive in the business for tax purposes. This means that passive income from Bitcoin mining should be allowed to be offset by passive losses from real estate investments.” He also says, “the language ‘should be’ is used because the IRS has not said one way or another. It simply says that Bitcoin is a commodity.”

Bitcoin Tax Planning

Tom advises, “If you are merely holding Bitcoin or another cryptocurrency for investment, you may want to consider owning it in an IRA, 401(k), or other qualified retirement plans. You can buy and sell Bitcoin to your heart’s delight within a Roth and never be taxed on it. What you can’t do is use it for personal purposes, for example, to buy a Tesla.

Just like other investors, if you have a solid tax strategy, you can legally and permanently reduce or eliminate their tax liabilities.


Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

You May Also Be Interested In:

Ivermectin is Human Medicine, Too

Happy Hump Day! As Mrs. Ring practically chews off God’s ear with her prayers, I rarely get a word in edgewise.   But Lord, if you’re listening, please save us all from the uneducated asshats parroting horseshit – or would it be horse-paste shit? – about Ivermectin. Let me explain. Why The Fifth Column is Now...

Robert Kiyosaki

Robert Kiyosaki, author of bestseller Rich Dad Poor Dad as well as 25 others financial guide books, has spent his career working as a financial educator, entrepreneur, successful investor, real estate mogul, and motivational speaker, all while running the Rich Dad Company.

View More By Robert Kiyosaki