What is cryptocurrency tax: Beginner's guide into crypto tax
In the early days, financial regulators considered cryptocurrencies a selection of a few people. As such, they didn�t require virtual currency investors to pay taxes on their profits. Since cryptocurrency adoption has increased, taxmen in many jurisdictions demand a cut on profitable crypto activities, whether buying, selling, or using crypto to purchase goods and services. In this guide to cryptocurrency tax, we shall look into how the taxman calculates crypto tax and whether investors should pay capital or income tax on their crypto gains.
What is cryptocurrency tax?
Cryptocurrency tax is a tax charged on virtual currencies when they increase in value and sell them. The tax rate can either be as capital gains or income depending on how often you hold on a crypto asset. Capital gains tax is charged when you sell after holding a cryptocurrency for a long period while an income tax is charged on investors who frequently buy and sell virtual currencies and realize a profit.
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Let�s clarify something. Just holding cryptocurrencies doesn�t attract taxes. Cryptocurrency tax kicks in when you sell the crypto and you make a profit. When the selling and buying result in losses, no tax is owed.
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Another event that doesn�t require you to pay taxes is when you donate your virtual coins to a non-profit or a charity. When you receive crypto as a gift, the tax applies only when you sell. In the United States, you can also be exempted from paying tax when you gift a friend crypto not exceeding $17,000 per year. Transferring crypto between your wallets is also a non-taxable event.
Factors that determine whether cryptocurrency tax is charged on capital gains or income
When is crypto taxable as capital gains?
Cryptocurrency is taxed as capital gains when you sell your coins for cash, convert to another crypto, or use it to buy goods and services. Note that capital gains tax applies to things like real estate, bonds, stocks, and NFTs.
When is crypto taxable as income?
The tax man like the United States Internal Revenue Service (IRS) considers crypto to be an income when you receive it as a salary, exchange it for goods and services, when you mine cryptocurrency, and when you earn dividends from your crypto staking activities.
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Receiving free crypto from an airdrop or a hard fork event also attracts income tax. Crypto is also considered an income if you receive it as a reward for inviting a friend to a cryptocurrency exchange, completing tasks on an exchange among other such activities. Note that income tax is charged on income.
Do you need to file crypto taxes?
In some countries, cryptocurrency taxes are overlooked but not in others like the United States. The main reason why you need to file crypto taxes is because it�s the right thing to do and puts you on the good side with law enforcement agencies. In short, it�s the law and you need to follow it.
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Tax authorities like the IRS are increasing their cooperation with cryptocurrency trading platforms to increase their surveilance on crypto users for cryptocurrency tax filing purposes.
Is it possible to avoid paying virtual currency tax?
You can avoid paying tax if you hold on to your crypto and don�t sell or if you gift it to charaitable courses. Also, you can gift it to friends and family like during Christmas or other festive seasons.
How do you pay your cryptocurrency tax?
Let�s look at paying crypto tax to the IRS in the United States. It�s worth noting that the process is largely similar to how crypto investors remit their taxes in other countries.
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In the United States, crypto users have two ways of paying their crypto tax. One is by using third-party platforms like CoinLedger and Koinly. Two, by directly filing with the IRS. They interact with the IRS using Form 8949 and Form 1040. On Form 1040, crypto activities are declared under �Schedule D.�
Conclusion
Our above guide into crypto tax indicates that crypto can be considered an asset or an income depending on how long an investor holds before selling it. If it falls under an asset, an investor is liable for capital gains tax on crypto whenever they realize a profit after selling their holdings.
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Frequent crypto buying and selling puts crypto in the income basket thus requiring a holder to pay income tax on profits made. For those looking to avoid paying cryptocurrency tax legally, gifting it to friends, family, and charitable courses are the only options available. To pay your crypto tax, consult the guidelines provided by the tax authority in your country.