This article offers the best insights on Tax and Cryptocurrencies, all you need to know, how tax on cryptocurrencies is treated across different governments in the world and different cryptocurrency tax software for easier declaration.
Bitcoin has long been termed as an anonymous cryptocurrency however a huge percentage of bitcoin transactions can be traced back as they happen on the public blockchain. Governments around the world have taken up regulation of digital assets to taxation as the key issue in the field. Some of the countries that have taxation regulations include U.S, China, Japan, U.K., Australia, Germany and surprisingly the crypto valley of cryptocurrency, Switzerland.
This article focuses on all you need to know about cryptocurrency taxes covering topics such as who can be taxed, how cryptocurrency taxes are categorized in different regulations, and how you can avoid the tiresome record keeping of your taxes as a cryptocurrency user or trader.
Table of Contents
- Understanding cryptocurrency taxes
- Events leading to taxation in the United States
- Categories of cryptocurrency taxes across the globe
- Paying your cryptocurrency taxes
- How to efficiently calculate your cryptocurrency taxes
Understanding cryptocurrency taxes
Cryptocurrencies and taxation represent two different poles in that one ensure centralization while the other the opposite, decentralization. Taxation is carried out by centralized governments and authorities placing strict regulations on citizens. Blockchains and cryptocurrencies, on the other hand, have been able to give people a decentralized system that has been symbolized with freedom from centralized governments.
Such a complicated relation between the two aspects of human society makes integrating taxation to cryptocurrencies almost an impossible task. Governments around the world are putting up tax regulations on public blockchain cryptocurrencies but only 95% of the transactions are monitored.
Will governments finally figure a standard way to tax cryptocurrencies? Will people understand cryptocurrency taxation?
Events leading to taxation in the United States
Taxation of cryptocurrencies in the United States affects the world view as the largest trading country in the world (Image: TIC)
The law differs from country to country as you will see below on how cryptocurrencies can be taxed and how each country offers its categorization of cryptocurrencies. In this section we focus on the United States’ regulation process on cryptocurrency taxing. The IRA terms cryptocurrencies as “property” hence any exchange happening using cryptocurrencies is liable to be taxation. The following list shows the events that will constitute to tax rules being applied on cryptocurrencies.
Events leading to taxation of cryptocurrencies in the United States
- The exchange of cryptocurrencies to fiat money termed as cashing out.
- Daily use of cryptocurrencies to pay for goods and services in merchant shops across the states e.g. purchasing a bagel using Bitcoin.
- Cryptocurrency to cryptocurrency exchange is also liable to tax.
- Receiving mined or forked cryptocurrencies.
Events not liable to taxation of cryptocurrencies in the U.S.
- Buying cryptocurrency with fiat money
- Donating cryptocurrency to a tax-exempt non-profit or charity
- Making a gift of cryptocurrency to a third party
- Transferring cryptocurrency between wallets
Categories of cryptocurrency taxes across the globe
Cryptocurrency taxes across the world can be broadly categorized into two; natural persons and legal entities. Further breaking down the two categories, natural persons constitute the individual who trades or hold cryptocurrencies, while legal entities refer to cryptocurrency companies and exchanges. Regulators around the world have categorized the taxes as shown in the table below.
Table showing difference in cryptocurrency taxation rules in countries across the world (Image: Crypto research report)
Despite China’s lenient stance on cryptocurrency taxation, the country has banned ICOs and cryptocurrency exchanges.
Paying your cryptocurrency taxes
One of the most boring and tiresome responsibilities adults have is filing their taxes whether its real estate assets, stocks, or cryptocurrencies. According to Forbes, here are a couple of important points that cryptocurrency holders in countries mentioned above should note before paying their cryptocurrency taxes.
Paying your cryptocurrency taxes is boring and exhausting
What to know before paying your taxes
- Know your numbers – Before paying your taxes you need to understand your income positions and deductible expenses to minimize your tax liability. Run your total income from cryptocurrencies and the anticipated income in the remaining part of the year. These incomes vary from crypto capital gains, income from mining or staking coins. Calculate your total expenses from your crypto investments. Remember investment interest is no longer an expense to U.S. investors.
- Minimize your capital gains – Nobody wants to pay the maximum amount of taxes liable to the government. One of the ways is to minimize your capital earnings through holding your crypto as any exchange is taxed. Furthermore, crypto investors should harvest their losses to offset the capital gains tax they have accrued. Finally, any time your capital losses in the year surpass the capital gains, you can offset your future taxes.
- Maximize your expenses – As you minimize the statements of your gains you can also maximize the deductions to be made so as to lower your tax bill. Some of the ways to maximize your deductions column include deducting the margin interest and short selling costs, selecting either actual itemized deductions of the standard deductions (whichever is higher) and maximizing the above the line deductions such as IRA contributions.
How to efficiently calculate your cryptocurrency taxes
Calculating your taxes has to be one of the most boring and tiresome bits of the year, now imagine doing that to every transaction you make using cryptocurrencies? Disaster. This has led to a couple of applications coming up to help cryptocurrency investors to easily plan their taxes. Such applications include Bitcoin.tax for capital gains and income calculations, H&R Block tax calculator and Zenledger.io.
Want to know more about it, join us on our Discord and Telegram channels and get into the discussion, or join our 8000 member community on our ICO DOG Investment Platform: