Cryptocurrency Buy/Sell Tax: An Unspoken Necessity?

In the financial world, cryptocurrency has undoubtedly been ruling the headlines, especially concerning various states taking measures either in favour or against crypto. While India is the latest country to develop taxation measures relating to cryptocurrency, it is not the only one. Other nations such as the United Kingdom, United States, Italy, Canada and Germany.

Despite all these countries establishing a tax regime for cryptocurrency, it is not treated equally or similarly in all of them. In the U.S. and U.K., cryptocurrency is treated as a capital asset, not currency. Therefore, it is subject to a capital gains tax similar to such other assets as stocks or gold. 

In Canada, the acquisition or holding of a cryptocurrency does not attract a tax, but the sale does because crypto is treated as a digital asset. However, the capital gains tax is only applicable to 50% of the gains. 

Tax authorities in Italy view cryptocurrency as foreign currency and levy a substitutive tax whenever income arises from speculative exchanges between cryptocurrency or conversion of cryptocurrencies into fiat.

The crypto taxation system in Germany is the only one that views cryptocurrency as private money and not a capital asset. Holding your crypto for one year then selling it does not attract a tax in Germany, but if you hold your crypto for less than a year, any profit above €600 from a sale is subject to be taxed.

Early February, India came up with its new regulations for the crypto industry, announcing a 30% tax on the transfer of digital assets, in addition to a TDS on payment made in relation to digital assets.

Crypto Taxation in the U.S.

Last year, over 10% of American citizens traded in cryptocurrency. U.S. law requires taxpayers to report all transactions relating to crypto to the IRS and applicable State authorities since different transactions attract different tax obligations. The IRS generally treats crypto as digital assets; the money gained from crypto is taxed differently,  either as capital gains or as income.

Crypto transactions that attract a tax are called taxable events, while those that do not are referred to as non-taxable events. Non-taxable events include simply buying and holding crypto, donating to a charitable organization, receiving or giving a gift, or transferring crypto between your own wallets.

Taxable events may attract either taxation in the form of capital gains or as income depending on the circumstances:

Taxation as Capital Gains

Selling crypto for cash and making a profit attaches an obligation to pay taxes. On the other hand, if you make losses on the transaction, you may be able to deduct that loss from your overall tax bill.

The IRS also considers the conversion of crypto from one to another a taxable event. For instance, you use Bitcoin to purchase Ethereum; you will technically have to sell the Bitcoin to buy the Ethereum. Taxes are owed to the IRS where this conversion results in a profit for the taxpayer. 

According to the IRS, spending crypto to buy goods and services is a taxable event since spending crypto is virtually the same as selling it and therefore ought to attract a capital gains tax. 

Taxation as Income

A person getting their salary paid in cryptocurrency is obliged to pay income taxes in accordance with their appropriate tax bracket. Businesses that accept payment in cryptocurrency also have to report the same to the IRS as income. 

Crypto miners owe taxes on their earnings based on the fair market value of the coins at the time of receipt, while the crypto mining enterprise is taxed as self-employment income. Staking rewards are treated the same as revenue from mining, and taxes are based on the fair market value of your rewards when you received them. 

When you hold certain cryptocurrencies and earn returns by holding them, these returns are considered taxable income by the IRS. They are treated differently from the interest one would earn from a conventional bank. Airdrops are also taxable as income, and the IRS requires that taxpayers declare them as income. Any other incentives or rewards taxpayers receive in cryptocurrency are also considered and taxed as income. 

Cost Basis, Capital Gains and Capital Losses

The amount of crypto you began with is your cost basis; it is generally calculated by how much you paid for it if you purchased the digital assets. If you acquired your crypto through mining or staking, your cost basis is determined by the fair market value when you received it.

When you make a sale, you can subtract your cost basis from the selling price when you make a sale to determine whether you have made a loss or gain. If your income is greater than your cost basis, you have a capital gain, while if your cost basis exceeds your proceeds, you have made a capital loss. 

Capital gains taxes are levied at both State and Federal levels and maybe long-term or short-term. The length of time you’ve held your crypto affects how much tax you will be liable to pay. Holding crypto for longer than a year yields a lower tax rate since short-term gains are taxed at the ordinary income rate, which is usually much higher and unfavourable.

Capital losses occur when you make less from the sale of a digital asset than you bought it for. However, this may work to a taxpayer’s advantage since those losses can be used to offset their overall capital gains for the year and reduce their tax bill. If a taxpayer has more losses than gains, a maximum of $3,000 can be used to offset income with any remainder carrying over to subsequent years until the full amount is applied. 

Filing Crypto Taxes

Various exchange projects have started offering their crypto clients a system-generated gain/loss report for the year’s crypto portfolio. Platforms like SolidProof, also offer audit services of smart contracts, helping boost the credibility of crypto projects. SolidProof uses manual and automated tests to find vulnerabilities in blockchain projects and recommends solutions while offering a verification badge to provide the community with a good sense of security.

The standard Form 1040 tax return now requires taxpayers to state whether they have been involved in any digital currency transactions and where this is the case, the taxpayer needs to have meticulous records. While crypto exchanges may provide you, the taxpayer, and the IRS the 1099-B reporting form, which is a record of your crypto transactions, it may fail to account for your cost basis if you made transfers between offline cold wallets and your account. 

However, these issues are being addressed with new technologies emerging from software companies enabling them to scrub the blockchain to detect transfers between your wallets, even those not on an exchange and report all transactions related to the relevant wallets within the year.

Certain tools have also emerged that connect to exchanges, keep track of your crypto assets and complete the requisite forms for filing cryptocurrency taxes.