How is cryptocurrency taxed?

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Do you own, trade, or pay in cryptocurrencies? If you answer yes, then it’s essential that you understand the financial laws around cryptocurrency taxation and how you can avoid unnecessary legal problems. In this article, we have talked about how cryptocurrency is taxed and more.

Are cryptocurrencies taxable or not?

Let’s start by addressing the elephant in the room. The answer to whether crypto is taxed or not is: YES. Using or being in possession of any cryptocurrency makes you liable to pay taxes. 

The rules and regulations around cryptocurrency are still in the making since it’s a fairly new addition to the finance market. That’s why tax laws are still unclear in many countries as to whether you need to pay taxes and, if yes, how much.

In countries like the US, the Internal Revenue Service (IRS) included cryptocurrencies as virtual assets in 2014. That means, if you are residing in America, you’ll have to disclose your crypto portfolio in your tax filings. 

Many European countries, too, treat crypto as an asset instead of a currency. It implies that the person involved with any virtual currency will have to pay the taxes according to the capital asset laws.

So the question is, when should you pay taxes on cryptocurrencies you own?

When is cryptocurrency taxed?

In general, whenever you sell cryptocurrencies for a profit, you’re liable to pay taxes. Let us layout the taxable events involving cryptocurrency:

When you buy cryptocurrencies and then sell them for fiat currencies, you’ll have to pay taxes. For example, if you sell $100 worth of BTC or any other currency, that income is taxable, and you’ll have to mention it in your income tax report.

If you receive crypto as payment, income tax is applicable on the equivalent amount you receive as payment.

If you’re an employee, contractor, freelancer, or any service provider paid in crypto, then income tax laws make you liable to pay taxes on the amount. 

In most countries, the rules aren’t clear about how this process works, so it’s better to consult a professional tax advisor. 

Directly buying any commodity from the market (in countries where applicable) is a taxable event.

In countries like the US and the UK, some places accept cryptocurrencies like BTC and ETH. Such events are also likely to be taxable, even though the rules aren’t clear as of now.

Trading cryptocurrency, for example, BTC for ETH, is another prominent tax applicable incident.  You have to keep in mind that you only need to pay taxes if you make any profit from it. Say you bought 1 BTC for $5000 in 2018 and sold it for $50,000 in 2021. Then you’ll have to pay the tax. 

But if you bought the same BTC for $5K and sold it for $2K, then you don’t need to pay anything. Tax is only applicable on the profit amount.  

How much tax do I have to pay?

In basic finance terms, investment is taxed over its capital gains.

A capital gain is when you sell your cryptocurrency at a profit. So to refer to the previous example, if you sell your BTC for $50K after buying at $5K, you have a $45K in net profit. That’s the capital gain amount you have.

Now there are two types of taxes depending on the period of your investment. If you hold crypto for 1 year (3 years in some countries) or less time, you pay taxes as per short-term capital gains laws. 

The tax rate is lower for long-term gains taxes that are deducted for investments spanning over more than one year.

Now that you have a clear idea of how taxes work for crypto, find out your country’s tax chart to have a clear picture of how much you have to pay. 

For instance, this is what taxes look like in the US:

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Picture credits: Yahoo

Closing Thoughts

Most countries have vague, unclear tax laws about cryptocurrency. That’s why it’s always better to be proactive about filing your taxes than not doing it and getting in trouble. Failing to submit tax papers could lead to penalties, tax evasion charges, and even jail time. 

The best advice I would give you is if you earn a substantial amount of income from crypto regularly, then consult a tax advisor. Ensure they are well versed in virtual and decentralized currencies and know about the latest developments in the area.

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