The world of cryptocurrency is one sector that is fascinating and drawing a wide swath of individuals to it. Why are they interested in this emerging sector? Well, it provides a wide variety of opportunities for wealth creation to those who know how to act and operate today. We all know that wealth is a key driver for progress, growth, and learning.
It is no different for the digital asset sector. The industry started with the leading crypto asset, bitcoin, and continues to make progress each year.
Bitcoin proves that the blockchain does have viability and can create value in multiple ways from commerce to ownership and transparency. It is common knowledge the leading digital asset is one that abhor centralized entities and is decentralized by nature. Banks and money processors are an anathema to bitcoin, and decentralization is core to the entire system.
The authority is present in the mathematically reliable codebase that executes transactions. Individuals with the right tools and resources can contribute computing power to the network and play a role in the process of verification. These operators contribute to participate and earn rewards which will be appreciated over time.
That means that it is likely to stick around and be meaningful to society for a while. It has the ability to change fundamentals in different industries and generate massive value. It is surely very exciting to be involved in the industry in some form or fashion.
From general ledger innovations to accounting and value transfer it can provide revenue for several entities. It can even be a boon to fintech and other segments related to finance and currency. The idea here is to bring about change on a massive scale.
But when people create transactions, middlemen, like the government, want a piece of the growing pie. Of course, this last point is a point of contention for many crypto enthusiasts but it is something that many must come to terms with over the long run.
Why? Speculators, businesses, and other entities in this market must pay taxes on transactions as they do in the traditional financial markets. This is especially true for those who continue to buy and sell assets and have a large set of transactions per year. Everyone must pay taxes and the government takes increasing steps to make sure they get what they believe they are rightfully owed.
Again, the relationship between bitcoin and the current superpower have an intriguing interconnection. Bitcoin seeks to provide freedom and usurp different power components of centralized money and value transfer that gives power to sovereign nations.
Detractors of the asset point to the fact that it could be used in negative and seedy situations from gambling to the facilitation of consciousness altering chemicals. The cryptocurrency has quite a few implications that can usurp traditional fiat oriented governance. Surely, you can understand why taxation of such a mechanism is important.
It appears that the present relationship will continue and evolve as the emerging industry evolves, creates jobs, and adds further value to society. Yet, it is essential to learn more about taxes and how it can relate to you as a crypto trader to preserve your freedom and wealth. Still, it is opaque and confusing and so people expect more clarity. Let us take a look at cryptocurrency and the notion of taxation within the industry.
The Leading Digital Asset Bitcoin and Government Taxation
It is a new game today and bitcoin is a more known factor. Transactions that take place within the bitcoin network are transparent making it to where motivated entities could potentially track down general non privacy oriented transactions. It is not as obscure as it once was and more companies seek to bring about sophisticated tools to help governments track those who make bitcoin and digital asset transactions.
Therefore, traders and others would notice a surge in facilitation hubs such as Binance and Coinbase mandating know-your-customer rules to be in compliance with the government and letting them continue their operations without any hassles.
These entities do so because they are known entities, they deal in large volumes and growing transactions of various digital assets. They don’t just facilitate bitcoin and other top tier assets but hundreds of them ranging from stablecoins to network oriented ones.
The larger their revenues, the more strict these facilitators must become with regard to their compliance. If they follow rules and they are house, then so must you as the player who frequents their space. Remember that the larger the space becomes, the more value that passes through the sector.
As more value continues to move here, the more taxes that different countries can collect according to their tax laws. If a portion of your gains is always part of government revenue, you better believe that they will look for it and make sure to collect.
As such, for instance, digital token traders in the United States and other nations must pay close attention to the edicts of the Internal Revenue Service and other government based institutions that oversee taxation aggregation. Other countries will have their authorities that are as strict as the IRS and may impose penalties and jail time for those who try to evade taxes.
Governmental institutions of all sorts note that it is a factor that must face taxation and so all parties in the digital asset world comply with these strict regulations to continue to exist and grow.
The critical question here is how should traders view this increasing taxation presence in the crypto asset industry?
The Cryptocurrency Tax Details
The answer, as many components of cryptocurrency, is not simple at all. Everyone knows that they must comply with edicts presented by their respective taxation authorities. Traders must realize that it is essential to pay attention to edicts that are etched into the law books.
Remember that regulatory authorities can put forth different proposals that are not relevant until it is a part of official legislation. Many rumors float around in the cryptocurrency sector that talk about what may happen due to statements presented by one regulator or another.
For instance, the tax codes in the United States are fairly the same since the IRS presented information in early 2014. What must you pay attention to in the United States and likely in other countries in regard to cryptocurrency tax law?
The first point is that digital tokens are treated as property. If one seeks to utilize crypto tokens to purchase another item it may be seen as a capital gain and the rate of taxes will depend on how long one clutched the digital token.
What does that mean? Let us say that you took it upon yourself to purchase a rare book with bitcoin that was valued at $10,000, you should also understand what your bitcoin is worth when you make the book purchase.
If bitcoin goes upto $12,000 when you purchase the rare item, you would buy a fiat noted good with a virtual currency that is valued at a higher price than in the past. The bitcoin outlay and price appreciation is now taxed in accordance with capital gains.
Why did we talk about goods and bitcoin transactions? Any bitcoin expenditure from good purchases to digital asset bartering is subject to capital gains tax.
It shows that movement of bitcoin can be expensive from a fee standpoint and from a legal taxation standpoint. Here’s how you can prepare.
Traders Must Disclose Information To Tax Authorities
Your local broker may not offer a 1099 form that details your transactions but you must still report your crypto transaction information to your local tax authorities.
What kind of digital transactions are of the taxable nature? We shall see that in general it will include these aspects:
- Conversion of digital assets to dollars, euros, or government oriented currencies
- Sending digital tokens to merchants and others for materials and service transactions
- Converting one token to another digital asset
- When obtaining forked tokens or airdropped assets due to holding a different tokens
It seems as if everything is tax oriented but here are those that are not:
- Acquiring a digital token with government money
- Digital token charitable contributions to exempt organizations
- Gifts to others
- Token movement from one storage account to another.
Calculating Your Tax Expenses From Cryptocurrency Related Transactions
Thinking about and doing the work in regard to your digital asset transactions is not as simple as it seems. Let’s look at a few scenarios and analyze it to provide more clarity.
Divesting Your Crypto Assets
Remember that when you want to turn your crypto gains into government money you must remember to note that gain or loss down for your tax records. Let us illustrate, you buy $100,000 (at the going rate of $35,000 per bitcoin) in June month.
You are patient and you wait three months, it is now $40,000. You sell a portion of your holdings. Now, you have a little gain in dollars but now owe on your capital gains. You will owe taxes for your short term gain. If you waited more than a year to sell, then you would see a lower tax rate on your long term transaction.
The tax rates will vary by country and by the length of the holding duration.
Now, what if you were a miner? When miners sell, governments can see it as revenue and can tax it as such. Therefore, if one has expenses related to this action as a miner, they can claim that as well.
The general idea here is that you should record your transactions and have a good understanding of what you are doing to profit or stay above water when factoring in government taxes. Again, you want to take good notes because you want to know which ones are trades and which ones are purchases of goods and services with bitcoin as those differ slightly.
Cryptocurrency Conversion
If you are like others, you don’t stick with one digital asset, you are bartering them to make profits. One day it might be bitcoin to ethereum, the next day might be ethereum to litecoin, and the next might be ethereum to numerai. No matter how you slice it, you are converting on crypto to the other one and seeking profits.
But of course, this will incur taxes. What is happening in crypto conversions is that you are divesting, say, a bitcoin to acquire ethereum. That means you will need to note the price of the initial asset and the price of the second asset as well as the date. You might not need to make detailed notes everyday as the exchange could automatically record transactions but it is better to play it safe. Keep an excel or google sheet to record digital asset movements.
More entities look to offer more services to make this aspect as simple as possible each year.
Precautions and Professionals
The simple lesson is to take great precautions in your crypto trading to minimize your chance of audit from your local tax authorities. Then, you want to make sure to keep a transparent and simple record of all transactions from trades to purchases of goods with crypto differentiate them and have the right cost basis.
Finally, a significant portion of people might turn to professionals such accountants to pore over their crypto transactions and conduct the right operations to stay in line with the tax authority. If you feel comfortable crunching your numbers for taxes you might opt to do it yourself but safety is found with professionals.
Professionals are learning about the industry, becoming better, and even using tools to improve the process. Speaking of, crypto tax tools are also out there to help you out but you still must double check your numbers to stay safe from tax authorities.
No one wants to pay attention to taxes. The fact is that it doesn’t go away. It is always there. Keep trading, cover your tax bases, and continue to earn safely by knowing the cryptocurrency tax rules and sticking to them.