Gone are the days, when cryptocurrency like Bitcoin, Etherum, Feelium, etc. were just used as investment coins. Today, a lot of people around the world are utilizing them as utility coins for buying goods and services. As the popularity of digital currencies is growing day by day, governments all around the world pay close attention to these assets and are ramping up their efforts to make sure businesses, as well as, individuals file their tax return on cryptocurrencies. Are you aware of digital currency taxation laws? How to file the return for crypto? If not, you should continue reading this blog to find information related to taxation of digital currencies in detail.
Cryptocurrency Taxation: Why It Matters?
The subject of crypto taxation is a matter of confusion for investors mainly because the tax regulations related to these vary from country to country. As different countries have different regulations, it is important for investors to research a country’s tax law to understand the specifics and enjoy the benefits of digital currencies without violating the law.
For instance, in the United States, cryptocurrencies are considered as property instead of a currency. This simply means that bitcoin and other digital assets would be treated much like stocks, bonds, gold or real estate. The classification of digital currencies as property means that you are obligated to report your capital gains and losses from your digital currency trades on your tax return. Falling to do so would be considered a violation of law or tax fraud in the eyes of the government.
Like the United States, different countries have different taxation laws for cryptocurrencies. So, if you are unaware or unsure whether your country classifies selling, trading or utilizing digital currencies as a taxable capital gain, it would be good to do your research or consult with experienced tax professionals to avoid legal problems. You can continue reading to know how cryptos are usually taxed in different countries.
How Cryptocurrencies are actually Taxed?
When it comes to avoiding tax while dealing with digital currencies, nothing can replace a real working knowledge of how crypto taxation works. This is important because not every bank, financial custodian, investor, and consultant has an idea about such kind of taxation.
So, how exactly is cryptocurrency taxed?
Before digging the answer to this question, it is important to have a clear understanding of the term “taxable event” and other such cases in which a cryptocurrency can be taxed.
A taxable event simply refers to any crypto-related actions that result in a tax reporting liability. Whenever such an event occurs, you will have to report your capital loss or capital gain in your income tax return. Here are different situations in which your digital asset could result in capital gain or loss.
- When selling crypto for fiat currency
- When selling crypto for another cryptocurrency
- Using cryptos for buying goods or services
- Any earning from digital currency
What are not considered as Taxable Events?
- Using crypto for charity
- Transfer of digital assets between exchanges or wallets
- When buying crypto using USD
But you need to keep in mind that, this can vary from country to country. So, it would be good to know your country rules and regulations before putting your leg in the crypto space.
In the crypto space, the term exchanges refer to platforms where the trading of cryptocurrencies is usually done. If you are using an exchange for buying, selling or trading of any digital currency for fiat or for other digital assets, you should be aware of your country’s taxation laws to avoid tax-related issues as it can be a costly endeavor.
Cost basis refers to the total amount of money spent on buying any assets. In the crypto space, it refers to the price of each coin as well as the related costs like exchange fee. The calculation of cost basis is pretty challenging because its process varies from country to country. For instance, FIFO or LIFO methods are usually used for calculating crypto gains in the United States wherein in Canada it is usually calculated using an average cost basis.
In many countries, cryptocurrencies are considered as capital assets. So, if you are making any profit from digital currencies, you have to pay capital gain tax on the fiat value of that gain. If you experience loss against your capital gain, it will reduce the amount of taxes owed.
Income tax is filed against the income one makes. In crypto space, you have to file income tax on what you have earned as a salary or commission. This means that you have to file an income tax return even when you are working as a miner or part of a crypto-oriented firm. You should also pay tax if you invest in other digital currencies.
This is all about crypto taxation. If you are still in doubt, it would be good to consult with an experienced and specialized tax professional. The bottom line of this discussion is that you have to keep the tax part in mind when dealing with digital currencies to avoid legal problems. Cryptocurrency is a trending space and with acceptance by countries like Germany, France, Singapore, the future scope of holding on to these is bright.