You must pay a 30% tax on any cryptocurrency trading, selling, or spending earnings as well as a 1% TDS tax on any sales of cryptocurrency assets that exceed ₹50,000 in a single fiscal year
Despite having the best of intentions, cryptocurrencies like Bitcoin and others are no longer the secretive and private digital assets they once were. While complicated, paying your crypto tax is a crucial step that guards you from future conflict with authorities like the IRS.
It’s no secret that use of virtual currencies like Bitcoin and Ethereum is accelerating globally. Each year, the number of cryptocurrency owners rises, by 39% in 2022 alone.
Unfortunately, tax payers still have no idea how to declare cryptocurrency income. Do all cryptocurrency trading profits count as capital gains or ordinary income? Are each and every one of my cryptocurrency transactions taxable events?
This crypto tax tutorial will hopefully address all of your fundamental inquiries and get you ready for the upcoming tax year.
Why Is Bitcoin Tax So Complicated?
If most of your crypto activity happens on Binance or Coinbase, you shouldn’t have too much trouble. These large crypto exchanges provide plenty of comprehensive tax forms, documents and tools that simplify your tax preparation.
However, the world of blockchain and crypto assets is a deep and dark rabbit hole. The deeper you go, the more complicated your tax return becomes. If you’re actively involved in DeFi, you’re probably earning extra taxable income through staking or airdrops. Some traders also have multiple wallets.
What’s more, not every trade is as simple as swapping fiat currency for crypto. If you’re flipping NFTs or trading crypto-to-crypto, you must always keep records of your purchase prices. Calculating your holding period is also crucial because that can influence whether your profits will be considered short-term or long-term capital gains.
Finally, every country is different. There is no global crypto tax software or income tax rates. What is true for the IRS in the United States is very different from what you can expect in Dubai or Singapore.
What Does the IRS Say – Capital Gains Tax or Income Tax?
Given that the United States has some of the highest adoption rates of cryptocurrency in the world, the rulings of the IRS are often followed by local taxation entities in other countries. According to the IRS, cryptocurrency is considered a capital asset, like property.
What this means is that any crypto gains or losses need to be treated as a taxable event. In crypto trading, this is deemed a capital loss or a capital gain, based on whether or not you profited from the event. On the other hand, any cryptocurrency earned from staking, mining, or airdrops is treated as income and is subject to income tax. This includes any crypto acquired from network hard forks, as we saw during the Ethereum Merge.
Not All Cryptocurrency Transactions Are Taxable
If you’re looking at your wallet history and starting to panic, don’t worry! Some crypto transactions don’t need to be registered on your tax filing. These common activities are not treated as taxable events by the IRS:
- utilising fiat money to buy virtual currency like Bitcoin or ETH.
- shifting cryptocurrency within your own wallets.
- cryptocurrency donations for good causes.
- giving others cryptocurrency as a present.
Gifts of cryptocurrency valued at less than $15,000 are normally tax-free for the giver. The gift will be regarded as a taxable event if the recipient decides to sell it. The fair market worth of the object and the gifter’s purchase price must both be documented. A cost basis is another name for this.
Giving cryptocurrency to a charity is a wonderful way to conduct good deeds and qualifies the donor for a tax break. Usually, this deduction is equal to the capital asset’s fair market value at the time of the donation.
Bitcoin Tax Rates
With the few exceptions mentioned above, the majority of transactions, whether they take place in DeFi and NFTs or on a cryptocurrency exchange, are taxable events. Among them are, but not restricted to:
- swapping one virtual currency for another or exchanging cryptocurrency for fiat money.
- using cryptocurrencies to pay for products and services.
- obtaining cryptocurrency through airdrops, staking, or mining.
- receiving cryptocurrency payment for your income.
Similar to conventional taxation and finance, the amount of cryptocurrency tax you must pay is based on how much money you made through income or capital gains. Short-term capital gains or losses will apply to assets you’ve owned for less than a year. Your assets will be considered long-term capital gains if you have held onto them for more than a year.
Your aggregate income determines your tax bracket, with various rates being applied based on whether each taxable event is regarded as having a long-term or short-term holding period. TurboTax has a handy chart summarising the various brackets so you can have an idea of what to anticipate.
Additionally, TurboTax has a handy cryptocurrency tax calculator that will help you save time filling out IRS forms and guarantee that you finish your tax file correctly.
It’s crucial to maintain track of your cost basis, which is the fair market value of your assets at the time of acquisition, when figuring up your cryptocurrency taxes. You’ll need to use the FIFO (First In, First Out) technique to determine your cost basis if you’ve purchased the same cryptocurrency more than once. This implies that while preparing your tax return, the first assets you buy are also the first assets you sell.
Bitcoin Tax Losses
What a lovely world it would be if we exclusively had cryptocurrency gains and never faced any losses. A few red candles are unavoidable in cryptocurrency trading because nobody has a 100% strike rate.
The good news is that by declaring losses, you can lower your tax obligation. Tax-loss harvesting is a common strategy used by traders and investors to reduce the amount of capital gains taxes they must pay.
Take this hypothetical case to better understand how tax-loss harvesting functions with cryptocurrency:
- You spend $20,000 to buy one BTC and $1,000 to acquire one ETH.
- While you are holding both investments, ETH increases to $2,000 and BTC decreases to $19,500.
- You make a profit of $1,000 when you sell your ETH for $2000.
- You realise a loss of $500 when you sell your BTC for $19,500.
The $1,000 you made selling ETH will need to be taxed as capital gains if you don’t sell your BTC and experience capital losses. However, since you recorded a $500 loss on Bitcoin, you can utilise that loss as compensation for your gains. You now only have to pay tax on $500 rather than $1,000 of the money you made from your ETH trade.
On the other hand
Globally, taxation and regulation of cryptocurrencies are always being reviewed and updated. Every nation has complex cryptocurrency tax regulations that are subject to rapid modification. Keep abreast with local crypto regulatory standards at all times, and while handling your taxes, get advice from a tax expert or certified public accountant (CPA).
Why You Should Care
Avoiding your reporting obligations for crypto taxes could get you in trouble with your local government. You’ll avoid a lot of hassles at the end of each tax year if you keep up with the proper ways to pay your crypto tax.
Should I Report Crypto on My Taxes?
In your tax preparation, you must always disclose any cryptocurrency gains or income derived from cryptocurrency transactions. If you don’t, your local government body might accuse you of evading taxes.
If I don’t sell my crypto, do I still owe taxes on it?
No, generally speaking, only when you realise capital gains or receive income from bitcoin trades do you have to pay tax on cryptocurrencies.
Can I Deduct Cryptocurrency Losses?
Yes, you can deduct your cryptocurrency losses from your taxable income by offsetting your gains against your capital losses. This process, known as tax-loss harvesting, can be challenging. When filing your tax returns, we advise seeking advice from a tax expert.
Which nations do not tax cryptocurrency?
Some of the most forgiving cryptocurrency tax rules are found in nations like Singapore, Portugal, and the United Arab Emirates (Dubai). As a result, investors and traders in cryptocurrencies frequently choose to live in these areas.
Is purchasing Bitcoin taxable?
No, purchasing a cryptocurrency such as Bitcoin or another one is not regarded as a taxable event. The decision to sell or otherwise dispose of the asset, however, is a taxable event that needs to be properly registered.