Tax is a term that is hated by each and paid by everyone. It is an obligatory contribution to the government. Governments use these tax amounts to fund various sectors of resource development. They use this money to fund social security programs, healthcare programs, defense strategies, human capital, infrastructure development, etc. Crypto tax may not be a familiar concept for everyone, but if you are a crypto enthusiast who plans to invest in crypto, you need to know the basics of crypto taxation.
Crypto tax is the legal obligation of crypto possessors to report and pay a certain amount to the government as a tax. Cryptocurrency is a taxable asset because the government evaluates it as a private property and asset rather than a digital coin. In this article, we create a comprehensive guide to crypto tax for first-time investors in the arena.
What Is crypto tax
A basic understanding of the concept of crypto tax is necessary to understand the following: Crypto tax is the legal commitment and responsibility of the people who possess cryptocurrencies. They need to report and pay the appropriate tax amount to the government. Most countries consider crypto coins personal properties and assets like bonds and stocks. Every crypto user or investor who transacts with crypto coins is obliged to pay crypto tax according to the tax regulations and compliances of their country.
Revenue services consider cryptocurrencies’ property. This means that when you transact with this property, you either result in capital gain or loss. Then, you have to pay taxes when you earn from cryptocurrency transactions. As per the rules of revenue services, the gains resulting from cryptocurrency transactions are taxed as ordinary income.
Crypto taxation can be a complex procedure, you need to understand it comprehensively to enhance your cryptocurrency journey. If you are a first-time investor, you may not be aware of the way crypto taxation works. This article will equip you with the basics of the crypto taxation process and the events for which you are obliged to pay taxes.
Do I Have to Pay Taxes on Crypto?
The answer to this question is simple, yes you have to pay taxes on crypto, but, there are certain conditions in the taxation process. According to the compliances of revenue services and governments, any income or profits from the cryptocurrency transaction is taxable. If you are an individual or investor who possesses crypto coins and makes transactions with them, then it is important to know when you will be taxed and when you will not. To understand crypto taxation, you need to be aware of taxable events and non-taxable events.
When will you obliged to pay crypto taxes?
You are obliged to pay crypto taxes when you meet the criteria mentioned in the taxable events. You owe taxes on cryptocurrency if you use or sell your crypto for a profit. This is a taxable event because, as per the compliance of authorities, using or selling an asset is a taxable event. Taxable events are generally classified into two types. Taxable as income and taxable as capital gains are the two types of taxable events.
Let us take a look at the crypto taxable events and when you need to pay taxes on crypto.
Taxable as capital gains
You are required to pay taxes if there are capital gains in your cryptocurrency transactions. Let us look at the specific scenarios where you are bound to pay crypto taxes.
- Spending Your Crypto Goods And Services: If you use your cryptocurrencies to purchase goods and services, then you need to pay taxes for the respective transactions. For example, if you buy a smartphone using your Bitcoin, then it is considered a taxable transaction. According to the revenue services, spending crypto on certain goods and services is not different from selling it. Selling cryptocurrencies is subject to capital gain taxes.
- Selling Crypto For Fiat Money: You need to pay taxes if you sell your cryptocurrencies for fiat currencies. You are required to pay taxes if you sell your assets for a profit. You can deduct your loss on your taxes if you sold your asset at a loss. For example, if you purchased BTC for $5000 and sold it for $7500, then you will have to pay tax for the additional $2500 capital gain.
- Swapping One crypto To Another: Converting your assets to another one is a taxable event. In this type of transaction, you are technically selling your crypto assets before you convert them to a new one. The authorities consider this as a sale, so sales using crypto are taxable.
These are the scenarios where you are bound to pay taxes as capital gains. Any capital gains are subject to reporting and pay taxes. The next type of taxable event is taxable as income.
Taxable as income
You will have to pay taxes if you earn crypto assets as an income. Let us take a look at the details of how cryptocurrency taxes work when it is attained as an income.
- Paid In Crypto: If your employer pays you in crypto, then you have to pay taxes for that income. This specific situation will be commonly classified in the income tax classification.
- Accepting Crypto As A Payment For Goods And Services: You are obliged to report it and pay taxes when you accept crypto payments in return for goods and services.
- Mining: You need to pay taxes if you mine crypto. This mining process will be classified under self-employment income, so you have to pay taxes based on this scheme.
- Getting Crypto Via Airdrop Campaign: if you are an active crypto enthusiast, you might receive crypto assets and rewards from airdrop campaigns. Getting income via airdrop is a taxable event and you have to report it in your records.
Non taxable events
There are some events where you are not required to pay crypto taxes. Let us take a look at the major nontaxable events in crypto taxation.
- Purchasing crypto with fiat money and holding it
- Donating cryptocurrencies to an authentic untaxed charitable organization
- When you receive cryptocurrencies as a gift
- When you give crypto as a gift
- Transferring your crypto to another wallet owned by you.
If you are an investor who has cryptocurrencies in your hand, you are required to pay crypto taxes. This taxation will not affect you until you use that particular asset in certain transactions. The crypto tax will not be applicable if there is no immediate gain or loss. The crypto taxes will be implemented when you sell the assets and receive cash and other cryptocurrencies in return.
Read and analyze the taxable events and nontaxable events if you are a first-time investor in crypto and not familiar with the process of crypto taxation. This article doesn’t provide you any tax advice, this is a comprehensive guide that aims to equip investors and traders with the concept of crypto taxes. We recommend people consult a tax professional to know more details regarding this process.
The Bottom Line
Crypto is taxable and every transaction with it needs to be reported in the tax reports and paid. You need to pay crypto taxes for your transactions, otherwise you might need to face penalties and legal complications. The authorities have the right to impose various penalties like failure-to-file penalties, failing-to-pay penalties, civil fraud penalties accuracy penalties, etc. closely analyze the tax payable events and check whether your crypto transactions need to be reported and paid.
