Regulation regarding crypto changes from one country to another. But most financial regulatory bodies treat cryptocurrency as a property (and not a currency) for tax evaluations. You are subject to pay taxes on the capital gains made by selling or buying the cryptocurrency, or you exchange it for goods or products, or when you buy or sell it in exchange for fiat currency or the digital currency (cryptocurrency).
Though several rules have been stated, there have been no clear laws for the same. It is predominantly because crypto profits are similar to stock-trading profits, because the cryptocurrency can be purchased using fiat currencies, can fluctuate in value, and also can be exchanged to buy goods and services, or withdrawn at Bitcoin ATMs for cash. These activities make crypto transactions confounding!
Trading of crypto for making long-term and short-term gains
You need to create a portfolio where you keep track of the value of the crypto when you buy, sell or exchange it, just like you do in other stock markets. For instance, if you made a capital gain of $10,000 by selling, it will be subject to short-term capital gains tax rates (if it was held for under a year) or long-term capital gains tax rates (held for greater than a year).
Exchange from one cryptocurrency to another
The gains made on the exchange of one cryptocurrency to another are also subject to capital gains. The rate of the tax is irrespective of the time period you held the cryptocurrency for, be it held for minutes or years. Also, it is uniform for all.
Using crypto as payments of goods or services
Every time you make a crypto exchange for goods or services, you are taxed for the capital gain made over the transaction from the period of time of purchase to the exchange (or payment). For instance, if you bought a product with $5,000 worth of cryptocurrency, you would need to keep a record of when the purchase (of the value) was made. Suppose it was purchased at a value of $1,000, so, you would be taxed on the profit of $4,000 you earned in the trade. The tax rates are subject to the duration you held the capital gain for. It is short-term for gains held under a period of one year, and long-term for over a year.
Crypto Tax Loss
If you sell (or exchange) a cryptocurrency at a loss, you are entitled to the crypto tax loss. This could be used to offset other crypto gains. Short-term losses offset short-term gains, and long-term losses offset long-term gains. They can also be used to offset gains from stocks and mutual funds. If the crypto loss exceeds crypto gains, then it could be potentially used to offset other incomes like wages (the upper limit of offset is fixed). However, if the losses are not fully used for the annual income incurred, they could be netted for any future stock trading or crypto gains.
Airdrops and Crypto forks
Unique events on the blockchain, like forks or airdrops, are subject to tax. If a new coin results from a hard fork (conversion of invalid transactions and blocks to valid), the new coins are taxable as your ordinary income. Similarly, crypto airdrops (free promotional distribution of coins and tokens by companies) for existing token or coin holders are also taxable at regular income tax rates.
Crypto mining and staking
This is considered as ordinary taxable as any other income since it is a service provided by computers to the blockchain networks. Owners receive cryptocurrency in exchange for their services. The value of the cryptocurrency received at the time of transaction is reported to be taxed at the regular rate. However, if its value increases when it is sold or exchanged, capital gain tax is levied over it.
For instance, if you are paid $1,000 for mining activity, you are taxed at the regular rate. However, when sold (or exchanged) it, the market value of the currency was $1,500. The profit gain made ($500 in this case) would then be calculated at the capital gain rates, subject to the time duration you held that gain for.
Tracking and reporting the record
Since cryptocurrency taxation is a complex and sophisticated procedure, consistent and diligent like buying, selling, or exchanging, and thereafter, properly reporting is the sole responsibility of the crypto owner. You can use one of the numerous tracking applications to record all the transactions safely. It is important to note that even if the cryptocurrency exchange you selected for the transactions does not report to the jurisdiction of your area, you still are obligated to report all of it. In other words, there is no escape from the taxes even if you are investing in foreign exchanges, since it would be an additional foreign asset reporting requirement.
Cryptocurrency transactions add a layer of intricacy to the existing taxation system. However, the fundamental nature of the transactions does not change with the platform. Therefore, all the normal rules very well apply to the virtual currency space.
Founder Dinis Guarda
IntelligentHQ Your New Business Network.
IntelligentHQ is a Business network and an expert source for finance, capital markets and intelligence for thousands of global business professionals, startups, and companies.
We exist at the point of intersection between technology, social media, finance and innovation.
IntelligentHQ leverages innovation and scale of social digital technology, analytics, news and distribution to create an unparalleled, full digital medium and social business network spectrum.
IntelligentHQ is working hard, to become a trusted, and indispensable source of business news and analytics, within financial services and its associated supply chains and ecosystems.