If a central authority does not regulate cryptocurrency, how are we taxed then? How do you file for it? Do you get taxed just by buying crypto coins? Is trading cryptocurrency taxable? What if you lost a massive amount of digital assets? What are the repercussions of this in my taxables? These may be some of your queries when it comes to cryptos and taxes. Your questions are both valid and important. This article will help you understand how the IFRS treats your digital assets and how they are taxed.
How Do We Treat Cryptocurrency For Tax Purposes?
For the question is trading cryptocurrency taxable, we first need to resolve how crypto is treated for tax purposes. The digital coins are not treated the same way as legal tender issued by the government. The value is not fixed treated more like property rather than a currency. Just like other forms of properties, like stocks, bonds, real estate, your gains, and losses are incurred when you dispose of the property. For example, when you buy a cryptocurrency of 10 coins for $10,000 and sell it after some time for $20,000, you gain $10,000 profit from that property. The government will then tax you for that capital gain. What percentage then do you owe the government?
How Is Cryptocurrency Taxed
There are two types of capital gains depending on how long you held on to your property for you to incur the gain.
- Short-term capital gains- you held on to your tax for less than 12 months
– You will be charged at your marginal tax bracket
– For example, if you gained $40, 000 for that year and filing as single, you will be taxed for 22%. Meaning the $10,000 profit will also be charged 22% tax
- Long-term capital gains – you had your capital for more than a year before you incurred gains
– You will be taxed at long-term capital gains tax rate depending on the income you earned that year
You will only be subject to tax when a taxable event happens, triggering you to report this when you file your taxes. What situations are considered taxable?
What Are Taxable Events
Taxable events are any actions or transactions that would result in tax charges for the party that commits the transaction. This will answer your question—is trading cryptocurrency taxable? In 2014, the IRS laid out the following guidelines for the world of digital currencies:
- Selling your digital currency
- Trading one digital currency for another currency
- Use of currency to buy goods or services
When you incur a capital loss, you can deduct it from your taxable income (check guidelines about threshold) to save you money from your tax bill. When you mine and receive bitcoins as payment for the service of solving a block, it will be treated and taxed differently.
Crypto As Income
You can treat the crypto you received in mining or staking rewards as an income. The day that the coins were charged to your account means that you earned whatever the coins’ value that day. For example, if you got 0.5 ETH for mining on Dec 4, 2020, since ETH is valued at US $ 616.72 the day at the moment of transaction, it means that you earned US $ 308.36 for that service. The process is the same for coins received for staking.
If you’re having trouble keeping up with the recording and the changing price of crypto in the market, you may use software made for tax purposes. Check out available crypto tax software in the market when researching about the question – is trading cryptocurrency taxable?
There are actions that you do with your crypto that looks taxable at first but is actually not, and here’s why:
- Buying and holding your crypto – When you buy your crypto, it just meant that you acquired that “property.” So if you’re just holding on to it, it means that whatever value it has at that moment is not yet realized unless you sell it. For example, suppose you have 20 Bitcoins in holding, and suddenly the price of the coins increased by 30%. In that case, it does not automatically mean that you earned 30% of your capital because that might not be the case anymore when you actually sell it.
- Crypto transfers – If you move bitcoins or any other currency from one wallet to another, it does not count as a taxable event.
Now that you know the answer to your question—is trading cryptocurrency taxable? You can now file your taxes knowledgeably. Tracking your trades will be essential to be able to file your taxes correctly. For some, doing this can be really troublesome. You don’t have to worry since there are available crypto tax software that can help you make this process automated. Now you can focus on analyzing the market trends and anticipating the trading opportunities. Learn more about cryptocurrency taxes here!