Cryptocurrency Tax: Do You Pay Tax on Crypto?

Cryptocurrency Taxes

While investing in a project, the taxes related to it can usually be smoothly identified in the tax laws.

However, the tax schedules regarding cryptocurrency can be difficult and hard to understand.

Moreover, as digital currency keeps growing day by day, it has become an issue not to pay taxes accordingly.

The IRS, Internal Revenue Service, has advised cryptocurrency holders to clear all their previous tax payments, as most of them had skipped out on taxes due to inadequate knowledge about it.

Hence, it’s an obligation to pay taxes on your cryptocurrency if you wish to avoid penalties.

The process of cryptocurrency taxation differs worldwide. While the United States of America treats cryptocurrencies as capital assets, Argentina requires your wallet balance, where you expressed the transaction in pesos rather than crypto.

In France, the ‘crypto-crypto’ transactions remain exempt from tax, while only the ‘crypto-euro’ ones are taxed. However, Australia has included a separate clause regarding cryptocurrencies/bitcoins, which subjects them to certain taxes.

The cryptocurrency tax collection might seem strenuous as they vary everywhere. However, the European Commission Services strive towards attaining a Digital Finance Strategy, which shall cancel this process's extra burden.

About Cryptocurrency

A cryptocurrency is a digital form of currency that is used for the exchange or store of wealth.

It has been accomplished through an anonymized blockchain technology, which helps you carry out all your transactions at ease.

An essential point to remember - cryptocurrency does not have a physical existence, which refrains you from touching or seeing it. You can, however, store it in a digital wallet and use it for the future!


Cryptocurrency Equals Property

Not many tax clauses exist concerning cryptocurrency, which leads to the IRS deciding to consider it as a property. Therefore, the cryptocurrency taxation process would be similar to that of a regular property tax.

To achieve the correct base income for the tax to be charged, you need to identify the fair market value of the cryptocurrency, that too, in dollars. It will easily convert your cryptocurrency into traditional money so that it can be taxed afterward.

However, the major obstacle here is to keep records of all your transactions. Detailed bookkeeping is required to make sure all your exchanges have been noted.

Remember, if you skip out on any transactions, you might have to revise them later, when it would be nearly impossible to reconstruct those exchanges.

Therefore, using any bookkeeping software to update your logbook would be an effective way to keep all your transactions in check.


How Gains and Losses Affect Crypto Tax

Taxes are charged on taxable income, which fluctuates following the gains or losses that have been incurred.

Similarly, the profit from cryptocurrencies adds to your taxable income, while the loss lowers it.

If you manage to invest in a cryptocurrency and then sell it off, the difference between your buying and selling price would be considered as gain/loss.

Since cryptocurrency is viewed as a capital asset, it is termed as ‘capital gains/losses’; These gains and losses are adjusted to your taxable income accordingly while deducting any tax exemptions. 


When is Cryptocurrency not Taxable?

To clarify, not every action regarding cryptocurrency is taxable. There are certain circumstances where tax is not levied on your cryptocurrency. The following situations explain when you are not eligible to pay tax on your crypto-coins:

  • When you buy and hold the coins: 

    It might seem that investing in a cryptocurrency is what makes you pay taxes, but that is wrong. Once you invest in a coin, the decision remains yours whether to use it or hold it. If you decide to detain it, then taxes will not be levied on your cryptocurrency. Reason? It is because you aren’t gaining or losing through the coin, but only possessing it. Hence, no taxes shall be levied as no transaction is taking place. 


  • Transferring from a wallet to another wallet:

If you wonder, 'What if I choose to send 2 of my bitcoins from one wallet to another? Will that be considered a transaction?’ The answer is no, and it would not be considered a transaction. Transferring cryptocurrency from one digital wallet to another, keeping in mind that both wallets belong to you, shall not be taxable. It is not a selling/ disposing of regarding the currency whilst no taxes are levied.


How to Calculate Cryptocurrency Taxes

Now, the question arises- How much tax do I have to pay?

This question depends on the value of your total taxable income. Every country has a set-aside calculation policy regarding taxes, and the percentage of tax payable ranges to various amounts depending on your net taxable income.

Once you have calculated your capital gain/loss due to a cryptocurrency transaction, that gain/loss amount is considered as ordinary income afterward.

It means you can view that as income from fiat money and move forward with your tax calculations.

Even though converting the cryptocurrency into fiat using fair market value can be a tiresome task, the rest of the procedure is moderately easy!


Final Thoughts

Most of the time, cryptocurrency taxes cause confusion; they even drive some of the investors away! For a digitalized currency, how is the tax calculated? On what basis?

The simple answer to this question is the capital gain/losses. The declaration of cryptocurrency to be regarded as the property has somewhat made the calculation of taxes manageable, if not easy. Hence, the trick to avoid a mess while identifying your cryptocurrency tax is to convert it into traditional money.

Due to cryptocurrency being a fairly new concept, most of the world still hasn’t coped with their rapid evolution.

Therefore, cryptocurrency taxes can be easy to look over. However, the IRS may catch up to you in the latter years demanding the tax payments. Hence, spread this article with others and let it help you learn about the taxes of cryptocurrency and how to calculate them!


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