With the ever-growing interest in cryptocurrencies and crypto taxes, comes the increase in confusion regarding the same. This is primarily because most countries do not have definite rules and regulations want to deal with crypto taxes. Taxation on regular forms of income is burdensome, to begin with, never mind filing taxes on a nebulous, groundbreaking currency like crypto.
Cryptocurrencies – A brief Introduction
A cryptocurrency is a digital currency that is created and managed by using advanced encryption functions known as cryptography. Cryptocurrencies announced themselves to the market with the launch of Bitcoin in 2009.
Cryptocurrencies are decentralized currencies that use peer to peer technology. This technology enables all the cryptocurrency functions, such as the issuing of currency, transaction processing, and verification.
While this decentralization renders Bitcoin immune to Government, manipulation, and influence, the downside is that there is no central authority to supervise and ensure that operations run without hassle. Bitcoins are created and acquired digitally through mining. This process requires powerful computers to solve complex algorithms to obtain Bitcoins.
As you may have gathered thus far, Bitcoins are fundamentally different from FIAT currencies, which are fully backed by the Government.
The issuing of FIAT currencies is an entirely centralized activity supervised by a nation’s central bank. While the bank regulates the amount of currency issued, there is no real upper limit to the amount of such currency issuance.
Bitcoin, on the other hand, does not operate this way. The value of a Bitcoin is entirely dependent on what investors are willing to pay for it at any given point in time.
Taxation on Crypto Taxes
In the United States, cryptocurrencies are generally treated as property. In other words, crypto is usually treated like real estate or gold sans the exact same rules.
Therefore, cryptocurrencies are subject to the short and long-term capital gains tax. They are subject to short and long – term capital gains depending on how long you hold them.
When is a cryptocurrency taxable?
Also known as a realization event, Trading cryptocurrency to a fiat currency like the dollar is considered a taxable event.
Trading cryptocurrency for another cryptocurrency is a taxable event. However, you will have to consider and calculate the fair market value in USD at the time of the trade.
Using cryptocurrency in exchange for goods and services is considered a taxable event.
When is a cryptocurrency not taxable?
Transferring cryptocurrency as a gift is not said to be a taxable event. However, the gift tax applies if you exceed the gift tax exemption amount.
A transfer between wallets is not a taxable event. You are allowed to transfer cryptocurrencies between exchanges or wallets without being subject to capital gains and losses.
Buying a cryptocurrency with USD is not taxable.
You don’t have to pay capital gains tax until you trade, use, or sell your cryptocurrency. If you hold your cryptocurrency longer than a year you will have to pay long-term capital gains tax. This is usually about half the rate of short-term capital gains tax. You will be subject to short-term capital gain crypto taxes if you hold your cryptocurrencies for less than a year.
The Future of Cryptocurrencies
There are some limitations and challenges that cryptocurrencies face. One such problem is the fact that one’s digital fortune can be erased in a matter of seconds by a computer crash, or can be robbed by a hacker. This may be overcome at some point as technology improves.
However, the issue is with increasing popularity, the more regulations and government scrutiny they are likely to attract, which defeats the fundamental purpose of the cryptocurrencies, to begin with.
There has been a significant increase in the number of merchants who accept cryptocurrencies. However, they are still very much a minority in the grand scheme of things.
For cryptocurrencies to become a household currency, they have to first gain widespread acceptance among the general population.
However, the advanced technology that runs this payment system and the lack of clear regulations is bound to be used only by the technologically advanced consumers and merchants.
The other major issue is the hassle of having to file crypto taxes, which requires a significant amount of time, effort and patience.
Filing Crypto Taxes made easy
There are several calculators to help calculate your crypto taxes. Here are a few:
Cryptotrader.tax
Cryptotrader.tax is designed to simplify the process of calculating crypto taxes once and for all. It enables its crypto users to compile trading data and history by integrating all the exchanges and bringing them onto one platform.
ZenLedger
ZenLedger provides a simple solution to ease the process of calculating your crypto taxes on a user-friendly interface.
Zenledger is integrated with the best exchanges and supports all the significant crypto and fiat currencies.
BearTax
BearTax makes for one of the easiest ways to calculate your crypto taxes. Its platform is integrated with 25 leading exchanges to calculate your gains (or losses) and exports the necessary documents file with your taxes.
BearTax is loaded with a bunch of useful features. To start with, the UI is easy to use. Also, your withdrawals and deposits across all the exchanges it supports can be reviewed on the interface.
Cointracker
CoinTracker is known to be a hybrid crypto-asset tracker and software for reporting crypto taxes.
Cointracker’s platform automatically synchronizes your asset balances and crypto transactions from your accounts, thereby providing the latest information on your crypto-related activities.
