Cryptocurrency – the word you can hear on almost every corner in the last few years. The popularity of digital currencies is growing every single day. Logically, the main reason why that is happening is the will of the governments around the world to accept digital currencies as a legit payment system.
That is the reason why things in the business world are drastically changing. Many businesses now accept crypto-based payments. They want to attract a new group of people by following the latest trends. Despite that, many online casinos are allowing crypto users to enjoy their games as well. Websites like advfn.com properly describe the importance of Bitcoin and other altcoins in the gambling industry and every other business field.
Yet, is everything around digital currencies simple? Actually, it is quite the opposite. The popularity growth confirms the competition in that field is tough. Because of that, you need to work on the improvement of your knowledge before making the first steps in the crypto industry. Despite that, many people are happy to see that many countries are trying to regulate digital currencies. However, that also means they are slowly becoming taxable.
Not paying the necessary taxes is a crime, and you need to get familiar with them before you start investing. There are a couple of things you should know about that subject, and it is about time to find them out. Let’s get started!
Is CryptoCURRENCY even a Currency?
According to most of the laws in the world, cryptocurrency is not a currency – the law treats it as property. That is the reason why crypto taxes are a bit specific. You should not forget this piece of information when reading the remaining part of the article. Things will be much clearer in that way.
All Types of Crypto Earnings Are Taxable
Let’s define the phrase “taxable event”. It refers to any type of action where people need to report their income and cover the tax costs. There are four different taxable events when we talk about cryptocurrencies.
Logically, exchanging crypto for fiat is an unskippable part of that list. Whenever you want to exchange traditional currencies and withdraw them to your bank account, you will need to pay the tax. How much you will pay depends on the country where you live. However, the rule counts for all the most popular national currencies such as Euros, Dollars, Pounds, etc.
The same rule counts when you plan to convert one digital currency to another. There is a good reason why you should remember this. IRS considers crypto-crypto exchanges differently than you may think. They consider that you had to exchange one crypto for dollars then purchase a new one with the amount of money you earned from the first exchange.
The third situation when cryptos become taxable is the situation when you earn digital currencies. It doesn’t matter how you did that. You could be a miner or simply a company that accepts crypto-based payments. In all cases, you will need to report on your tax return.
The fourth case is usually the less popular among crypto users. Keep in mind that crypto is not a currency; it is a property! Because of that, whenever you use it for some commercial transactions, you will need to cover the tax costs. Responsible authorities consider that you sold crypto for cash and, then, you used that money to make the transaction.
There are also some non-taxable events when you can forget about these concerns. For instance, when you are donating the cryptos, you are free of any type of charge. Despite that, if you send a gift to your kids, parents, or spouse, you do not have to pay taxes. However, if you send a gift to a friend or someone else, you will have to pay the so-called gift tax. The percentages are, in that case, different.
All the Earnings Are Based on Losses and Gains
Imagine that you have to report all the digital currencies you have a pay the taxes for all of them. Would that be profitable? Fortunately, governments around the world understand that. You will need to pay taxes only for the capital gains.
However, here comes the moment when you need to do your part of the job. Two pieces of information will help you calculate your capital gains – fair market value and cost basis at the time when you made the transaction.
Cost basis is those expenses that you need to pay for every coin you purchase. However, they also cover all the expenses associated with the entire procedure such as transaction fees.
Let’s imagine that you purchased Litecoin. You invested $200 when the value of one LTC was only $10. That means you purchased 20 coins. The transaction fees for the entire process were only 1.5%. That means the cost basis are $200 * 1,015 / 5 = 40,6. That means your capital gain is 159,4. That is the amount of money that becomes subject to tax.
There is no reason not to report all the gains and losses. For instance, if IRS does not have insights into your cost basis, they may think you own much more than you do. For instance, they may start thinking that you possess a big number of crypto wallets where you hide your PROPERTY. That type of nightmare is something you would want to avoid for sure.
IRS Gets Data from Crypto Exchanges
Here comes another reason why hiding your digital currency will not pay off ever. Crypto exchanges are directly collaborating with IRS. Keep in mind that exchanges went through many years of legal battles. Without proper collaboration with responsible authorities, Bitcoin and other altcoins would probably not be legal today.
Whenever you get suspicious, IRS can require information about your transactions from crypto exchanges. Imagine that you haven’t reported any of your earnings. In that case, you will probably need to pay a penalty of 75% of the amount you didn’t want to report. Will you manage to cover those costs?
These are four things you should know about cryptocurrency taxes. Don’t try to defeat the system with some useless strategies. The law is strict and its purpose is to maintain and control all cryptocurrency exchanges. That won’t only be good for the state or country you are living in. It will also be good for the reputation of the entire crypto world. True lovers can finally use their talents to start a journey without any obstacles.