How Is Cryptocurrency Taxed? (A Comprehensive Guide)

One of the most important economic stories of modern times is the alternative to traditional currencies. Commonly referred to as “crypto” and sometimes referred to as “digital currency“, the most popular examples are Bitcoin and Ether, but there are thousands of others.  Sensitive information is stored in a digital database using highly secure encryption technology (hence the name “crypto”). These discs do three things. They track ownership transfers, monitor new coin issuance and keep all transaction data completely secure.

While all of this sounds theoretical, the reality for millions of cryptocurrency owners is that their alternative currency has real value; it is taxable in many countries and treated as capital goods. It can be used like regular money and held for long-term gain just like stocks; and even mined (created) for profit.  Always ask your tax advisor to fulfill your legal obligations before investing in cryptocurrencies.

In this article, you will learn the basics of crypto tax. However, we recommend seeking professional help as the regulatory framework does not apply to all countries or jurisdictions.

What gives cryptocurrency its value?

Economics says that any form of currency derives its value from its usefulness as a medium of exchange (you can use it) and from the fact that it can be. Crypto has both traits which have led to its popularity.

On the other hand, the value of cryptocurrencies is not very stable like the values ​​of most traditional currencies. Think about the dollars in your bank. The only long-term change in their value is the fall caused by inflation. For comparison, look at the daily value of each of the major cryptocurrencies. Cryptocurrencies are volatile and fluctuate wildly against fiat currencies.

So while cryptocurrency can be said to be valuable based on the fact that it is a medium of exchange and a store of value, it is impossible to say how much Bitcoin or Ether will be worth tomorrow. For many investors, traders, and traders, the possibility of prices of popular digital coins skyrocketing is what keeps the niche so active and is what has caused so many cryptocurrency exchanges to emerge.

Why is cryptocurrency taxable?

Tax policies vary from country to country. The short answer to this question is that it all depends on your location, the type of digital assets you own, how long you’ve owned them, your gains and losses, and more.

For example, US law treats virtual currencies like Bitcoin and others as capital assets, just like the stocks or bonds in your portfolio. And since Bitcoin and altcoins are subject to capital gains and losses, you may have to pay taxes on them if you sell them for more than you originally paid for them. But it may not be the same situation with Singapore, Hong Kong and other countries. However, the rules change from time to time.

Of course, if you owe taxes on your cryptocurrency, the amount you owe will depend on the size of your capital gains and the tax rate you pay based on your income bracket (and a few other factors). The current tax rate for long-term capital gains by income category is 0, 15 or 20%.

How are Bitcoin and Altcoins taxed?

The cryptocurrency tax rate is based on the following factors: your income bracket; whether your trades are capital gains or losses; determine whether losses or gains are long-term or short-term; and if you are mining cryptocurrencies as a hobby or as a business venture. However, it is helpful to remember that most altcoin owners simply buy and hold cryptocurrency in hopes of making long-term profits.

There is another large group, namely cryptocurrency enthusiasts, who often trade various coins on major exchanges in hopes of making short-term profits.

Crypto Capital Gain vs. Capital Loss Tax

Taking the US tax system as an example, the standard rule on capital losses and capital gains applies to cryptocurrencies; Every year, cryptocurrency investors must declare all profits, both long-term and short-term, and pay taxes on them at a certain rate. However, if the investor shows a loss, he can use up to $3,000 to replace exactly the same amount of ordinary income.

What if your losses exceed $3,000? In that case, you would use the first $3,000 to offset current year ordinary income and the remainder as losses carried forward that can be carried forward indefinitely against capital gains in future years until the loss is fully spent.

Capital gains tax events

Regulators speak of “chargeable events” or situations that trigger a taxable person. So what are cryptocurrency tax transactions?

According to U.S. Tax Transactions Explained, you get a capital gain if you sell Bitcoin or altcoins that someone gave you or that you bought before. The basis of the coin is its value at the time you received or bought it.

So when you sell cryptocurrencies, you need to compare the value to your base. If the selling price is higher, you will make short-term or long-term profits, depending on the holding period. Even a one-year holding will result in short-term profit or loss. More than a year results in a long-term gain or loss.

Another way to make a profit is to use cryptography for goods or services. The Internal Revenue Service (IRS) considers this a “sale” of the coin and bases the sale amount on the value of the cryptocurrency at the time of sale. Suppose you bought a unit of ABC (hypothetical cryptocurrency) money five years ago for $50 and kept it until yesterday, when you used it to buy $200 of camping gear online. long term of $150 (that’s $200 – $50).

Similarly, if you mined a unit of ABC money six months ago when the coin was worth $100 and recently sold it for $1,000, the short-term (less than a year) capital gain would be $900. cryptocurrencies as a business, you also need to report this profit.

Capital loss tax events

Making losses by selling or using cryptocurrencies is as easy as making a profit.

Are cryptocurrencies taxable if used for retail?

The interpretation varies from country to country. Although some countries believe that using cryptocurrencies is not a taxable transaction, but according to the rules of the US IRS, using cryptocurrencies is like selling it, and it carries tax consequences no matter how small the amount. Since tax law classifies cryptocurrencies as a commodity, “consumption is a sale”, you must record the fair value of the coin when you spend it, compare the value to what it was when you bought it, and report a gain or loss on the transaction.