10 Tax Implications to Consider When Selling Bitcoin

There was a time in Nigeria when selling Bitcoin was straightforward—no government interference, tax deductions, just pure profit. Many traders took advantage of this, building wealth through crypto without considering tax obligations. But those days are over.

With Nigeria’s growing crypto adoption, the Federal Inland Revenue Service (FIRS) has been paying closer attention. While crypto wasn’t monitored legally before, new regulations, including the Finance Act, have brought more clarity to crypto taxing. Bitcoin transactions are subject to Capital Gains Tax (CGT), Value-Added Tax (VAT), and even income tax, depending on how you trade.

Before making that big sale, you must understand how taxes apply to your Bitcoin. In this guide, I’ll break down 10 key tax implications to consider before selling your Bitcoin in Nigeria. Here are the 10 essential tax factors to keep in mind before selling Bitcoin.

1. Know How Gains Are Taxed
2. Short-Term vs. Long-Term Gains Matter
3. Taxes Depend on Location
4. Every Bitcoin Transaction Counts
5. Losses Can Lower Your Taxes
6. Gifts and Inheritance 
7. Spending Bitcoin Can Be Taxed
8. A Tax Professional Can Save You Money
9. Stay Updated on Regulations
10. Plan Ahead 

10 Tax Implications to Consider When Selling Bitcoin

1. Know How Gains Are Taxed

Selling Bitcoin for profit means you could owe capital gains tax. Governments don’t see Bitcoin as regular money but as an asset, like stocks or real estate. For example, if you bought 1 Bitcoin for $30,000 and sold it for $50,000. That $20,000 profit is considered a capital gain. If your tax rate is 15%, you owe $3,000 in taxes. Tax rates depend on where you live and how long you hold the Bitcoin.

2. Short-Term vs. Long-Term Gains Matter

Holding onto your Bitcoin before selling can significantly impact your taxes. If you’ve had a Bitcoin for a short period, like a few months, and you decide to sell it, the gain you earn from it is called the short-term gain. Unfortunately, these are typically taxed at a higher rate, similar to your regular income tax bracket.

On the other hand, long-term gain is the gain you’ve earned from holding your Bitcoin over a long period, and it’s taxed at a shorter rate. Whether you hold your Bitcoin for a brief period or an extended period, both are subject to being taxed. Knowing the difference is crucial for thoughtful tax planning and can help you strategise your Bitcoin sales to minimise your tax burden and help you keep more profits.

3. Taxes Depend on Location

Different countries have distinct Bitcoin taxation regulations; hence, your crypto tax depends on the tax policy in your region.  For example, the taxation regulations for Bitcoin in Nigeria differ significantly from those in the United States. Some countries have zero crypto tax, but they’re rare. 

Don’t conclude quickly that a region’s tax policy is the same as another’s. To avoid surprises, it is crucial to investigate your country’s specific tax laws and, if relevant, your state or region before trading your crypto. 

4. Every Bitcoin Transaction Counts

For accurate tax reporting, ensure you keep a detailed record of your Bitcoin activity. Whatever kind of transaction you make, be it a purchase, sale or trade, ensure you keep track of accurate records because they all count. Always have it at the back of your mind that every time you buy or sell Bitcoin, it’s a taxable event. This means noting details like what you paid (Purchase Price), What you got from selling your Bitcoin (Sales Price), and the Transaction date. 

Sometimes, you may feel tracking every transaction can be very tasking, to be honest, it is. But don’t worry, you don’t have to do it all by hand! Some great tax tools and software programs can automate this process, making tax reporting much easier and less stressful.

5. Losses Can Lower Your Taxes

Not all Bitcoin sales result in profit. If you sell at a loss, that loss can help lower your overall tax bill. Smart investors use this strategy to their advantage. So whenever you sell your Bitcoin at a loss, that loss can balance the gain you’ve made from other investments. Short-term losses can balance short-term gains, and long-term losses can also balance long-term gains. This strategy, known as tax-loss harvesting, can be useful for reducing taxable income.

6. Gifts and Inheritance 

Transferring Bitcoin as a gift or inheritance can come with tax obligations, though it depends on where you live. Inheritance laws differ—some countries consider Bitcoin an asset subject to estate tax, while others may not. Check local regulations or consult a tax professional before gifting or inheriting Bitcoin to get the most accurate information.

7. Spending Bitcoin Can Be Taxed

Using Bitcoin to purchase something attracts taxes. If the price of the Bitcoin is higher than when you originally bought it, you’ll have to pay taxes on the profit. The government treats Bitcoin expenditures as selling and using the money to purchase your product. 

Also, airdrops and hard forks could be taxable if unsolicited because the IRS considers these “free” coins taxable income based on their original market value from the receipt. Always ensure you accurately record the date and value of these coins when received to avoid issues in the future. 

8. A Tax Professional Can Save You Money

Bitcoin tax laws are complicated and constantly changing. Consulting a cryptocurrency tax expert can help you understand local regulations and provide you with ways to reduce tax liabilities and avoid penalties for misreporting. If you’re dealing with large transactions, professional guidance is worth it to save you time, money, and stress.

9. Stay Updated on Regulations

Due to their complex nature, crypto tax regulations change frequently. To stay compliant, read news on crypto taxation often and use tax software to track transactions. Ignoring changes could lead to unexpected tax liabilities.

10. Plan Ahead 

Instead of waiting until tax season, plan your Bitcoin sales carefully. Time your Bitcoin sales often to make good sales decisions and avoid unnecessary tax burdens. You can do this by always considering your gains to ascertain whether they are short- or long-term. Remember, long-term gains are usually taxed at lower rates. Planning strategically ahead of your crypto sales will help you take advantage of lower rates and minimise your tax bills.

Frequently Asked Questions (FAQs) About Tax Implications to Consider When Selling Bitcoin

How can I prepare for Bitcoin-related tax obligations?

Stay informed about the latest tax regulations related to cryptocurrency. Plan your Bitcoin sales strategically to reduce tax liability and keep a track record of your Bitcoin transactions.

Do I need to pay taxes if I transfer Bitcoin between my wallets or accounts?

Generally, transferring Bitcoin between your own wallets or accounts doesn’t require taxation. Taxation only occurs when you sell, exchange, or use your Bitcoin for purchases.

How does the country I reside in affect my Bitcoin tax obligations?

Tax obligations may vary depending on the country in which you reside. Different countries have separate tax laws regarding cryptocurrency, so it is crucial to know the laws in your country.

How do tax laws differ for trading Bitcoin instead of selling it for fiat currency?

Tax regulations may differ depending on whether you trade Bitcoin (similar to stocks) or sell it for traditional currency. Trading may have different tax consequences than selling for cash.

Can I be taxed on Bitcoin I haven’t sold if its value increases?

Yes, some countries tax unrealised gains in cryptocurrencies. If the value of your Bitcoin increases, you may be taxed even if you haven’t sold it.