The world has truly entered the digital era, and leading the way in recent times as a pioneer and builder of future global economics and digital monetary transaction, has been cryptocurrency. Though still relatively new as world-changing technologies go, like any burgeoning tech industry, it was only a matter of time before taxes came into the picture. And while tax isn’t something that anyone wants to really think about, it’s essential when it comes to any currency – even crypto.
Although cryptocurrency taxes have not always been that clear or well-established in the past, especially in terms of all the different countries and their laws, in recent years though, things have changed. With the immense global surge in its popularity and use, as well as a rising need for regulation, taxes on crypto have been commonly instated throughout most places around the world.
Today, they have become standard for all trade and transactions in crypto, and for every type of cryptocurrency, from biggest to smallest.
Though some aspects of crypto tax may inevitably differ between different countries and regions, there is usually, however, a general system used throughout. The following is a basic crypto guide to help you learn and understand it, and to manage your crypto taxes more effectively.
Currently, the accepted legal definition of cryptocurrencies in terms of tax, is “digital property”. As such, taxes are deducted according to the gains it has generated over time as an asset. Generally, according to tax law, this means that whenever you buy or trade crypto there will be a “capital gains tax” along with that transaction.
How much you are taxed will depend on several factors. This includes the amount of cryptocurrency, your tax rates, as well as the length of time that the cryptocurrency has been owned, along with various other aspects. Time is a particularly important factor when it comes to crypto tax, as it determines whether it should be taxed for long or short-term gain.
It’s also worth keeping in mind that if and when there are any particular or unique differences within the law or system regarding crypto tax in your region and country, it is highly recommended and well worth finding out. This will help you to more effectively manage your crypto tax and avoid potential fines and unnecessary hassle in the long run.
Taxable Events
Generally, any events that affect a person’s crypto investment and are considered taxable must be reported for tax purposes. Knowing what taxes may apply in a given scenario is therefore important knowledge, for oneself, as well as tax revenue services. Taxable events can be divided into two main categories or types of taxes:
Capital gains tax
General income tax
A third category is for non-taxable events, in which taxes do not apply. Everything else generally does though, including free crypto rewards and promotions that you may come across online or in a crypto guide.
Capital Gains Tax
Most of what is taxed in crypto is generally a tax on the profit it has gained over time, called the capital gains tax. Because they are considered digital property, cryptocurrencies are taxed in a similar way to stocks or real estate, which is according to the amount of profit they have generated during their period of ownership.
Capital gains tax events can be divided into two main categories:
Short-term Capital Gains Tax This tax applies to all profits made from the sale of a crypto asset that was held for one year or less. Short term capital gains tax is usually around the same as the general income tax rate. The benefits of short-term crypto investing include bigger tax deductions, faster access to profits, greater ability to respond to market changes, and general flexibility in managing your portfolio. The downside to this is higher taxes than long-term capital gain, as well as less ability to predict the market.
Long-term Capital Gains Tax This tax applies to all profits made from the sale of a crypto asset that was held for more than a year. This is usually a lower tax than short-term, though it can also depend on your income bracket. In 2022, the long-term capital gains tax rate was between 0-20 percent, depending on taxable income. Other benefits include reduced tax liability, a greater level of prediction for market trends, and providing a hedge against inflation. The downside is more often complex laws and regulations, making it potentially less suitable for some investors.
Each has its positives and negatives, and so it’s up to the individual to decide which is more suitable for their portfolio. This can then be further divided into the following taxable events:
Trading Crypto As the most common general activity, trade has the major focus when it comes to tax. Basically, you will pay a tax on any gain you have made with the cryptocurrency you are trading. For example, if you want to trade Bitcoin for Ethereum, you will have to pay a Bitcoin tax on the gain that BTC has earned you since you’ve owned it.
Selling Crypto When selling crypto assets for cash, or even another crypto, such a transaction is likewise subject to a capital gains tax. You will have to pay taxes on any gains made by that crypto.
Purchase Of Goods & Services Buying goods and services with crypto also falls under the capital gains tax umbrella. Whether it’s a magazine subscription, a new TV, or a holiday, your crypto will be taxed according to its gains.
NFTs NFTs (non-fungible tokens) are considered the same as cryptocurrency when it comes to taxes, and so they are treated the same way. Capital gains tax applies when it comes to their purchase and trade.
Otherwise, the following instances, though relating to crypto and considered taxable events do not fall under the capital gains tax category but rather under ordinary income tax and rates:
Goods & Services If you are providing goods and services while receiving crypto as payment, you should apply for “ordinary income” in your tax report. An example of this could be hosting an event or selling a painting or article of clothing in exchange for crypto.
Crypto Salaries Likewise, salaries, wages, or any payments that contribute to a person’s income, that are paid in crypto, are considered to be general income for tax purposes.
Crypto Mining A common occupation around the world these days, any profit or income made via mining cryptocurrency also falls under the general income category.
Staking Crypto Income from “staking” blockchain liquidity pools, which refers to locking up a portion of crypto in a wallet or blockchain to support its functionality or to verify transactions, are also considered ordinary income and taxed accordingly. This includes all crypto rewards and bonuses earned via staking.
Crypto Airdrops Time-limited promotional crypto giveaways, often called “Crypto airdrops” are also taxable in this category. A common mistake is thinking that, because they’re free, they don’t need to be filed for tax at all. However, in reality, they are very much still liable for general income taxes.
Non-taxable Events
Aside from the major tax categories and events, there are a limited number of instances where taxes don’t apply at all. These non-taxable events include:
Purchasing Crypto With Cash The initial purchase of crypto with “fiat” currency, a technical term for ordinary cash, generally doesn’t involve a tax. Only when the crypto is traded or sold does it become liable for taxation.
Storing Crypto Currently, there is no tax on storing crypto in wallets and cold storage or any other storage platform.
Charity Donations Though it’s always worth checking the tax guidelines for your country or region, donating crypto to charity usually does not include tax. Additionally, a tax deduction for the fair market value of the donation may also be possible.
Crypto Gifts Though non-taxable gifts of crypto are allowed, there will be a limit on the amount that can be sent. Generally, this is fixed at around $15,000. Any more than that and it will become liable for tax.
Inherited Crypto No tax is generally deducted upon receiving crypto as an inheritance from a deceased relative or friend. This, however, may be subject to other pre-existing estate tax rules.
How to Avoid Paying Crypto Tax?
If you trade, buy, or sell crypto, or perhaps are part of a non-profit crypto organisation, there is currently no legal way to avoid paying cryptocurrency taxes. As the value and use of cryptocurrency increase, taxes are a necessary eventuality. Rather, it’s best to know which taxes apply to you and your dealings in crypto and to manage them accordingly.
How To Manage Your Crypto Tax?
Diligence and awareness towards tax regulations are highly recommended for anyone dealing in crypto and will greatly help you in managing your taxes in the most beneficial way possible over time.
Here are a few useful tips for managing your crypto taxes:
Keep accurate records. Keeping detailed and accurate records of all your crypto transactions will help greatly in managing your crypto tax. Apps can do this for you, but to be truly on top of things having your own personal spreadsheet and folder system and keeping track yourself is even better.
Always be sure to check for any unique laws and regulations that may apply to your specific country and region, regarding cryptocurrency. Never assume that a particular crypto tax law is universal or given. Instead, it’s always better to check. Such information can usually be found with a web search or by visiting the relevant government or tax revenue service websites associated with your country, province, state, or region. There are also various websites that are dedicated to listing and comparing global crypto tax rates, which can be of help.
Just to be safe, try to keep a sharp look out for any new tax regulations that may come about, or changes that may occur over time. This can potentially save you a lot of hassle.
Use software. There are plenty of useful quality apps out there designed for accounting and calculating taxes, etc. Generally, the better the app, the more it will cost. However, this can be considered an investment. Otherwise, there are also various free and open-source apps available to download and use.
Consult a professional. There are professional accountants and tax consultants available for hire that can impart highly valuable information and advice. Such professionals can also come at a steep price, but again, this can be considered an investment, and depending on the scope and scale of your ambition, may be well worth it.
Be on time with your tax reports. This has a number of advantages, the main one is simply to avoid any penalties and fines.
Final Thoughts
On one hand, regulation, particularly in the form of taxes, can be a pain in the neck, not to mention a burden on the wallet. On the bright side though, it’s a sure sign of growth – and healthy growth at that. If you look at any crypto guide, it’s easy to see that investment opportunities are booming. Not only has cryptocurrency firmly established itself as a technology of the near future, but it’s also helping to lay the groundwork for potentially even greater things to come.
While the regulation and adoption of cryptocurrency are still ongoing, it has shown the potential to positively impact the world in a number of major ways. From increased financial inclusion and services for the less privileged, to lower transaction fees, the offer of rapidly growing investment opportunities, as well as greater currency stability in increasingly uncertain times. All of this, packed together with unprecedented security and, when well-regulated, transparency, make cryptocurrency the hot topic that is today.
While there is no guarantee with technology advancing as rapidly as it is, there is little doubt that crypto will have a huge part to play in the years to come, and as a major player in the future of world economics.
