Cryptocurrency and Taxation Policies

The popularity of Bitcoin and other cryptocurrencies are on the rise. With each passing day, more and more people are embracing the concept of digital coins, which is good for the overall growth of the cryptocurrency industry. However, wider adoption has also caught the attention of tax authorities around the globe, and as a result, many countries have come up with taxation policies regarding cryptocurrencies.

Most recent guidelines have come from the Internal Revenue Service (IRS), a federal taxation authority in the US. Under these guidelines, cryptocurrencies have been considered as “property.” It essentially means that all the taxation policies which are applied to the property transaction will be applied to the cryptocurrencies. Just like the property, transactions related to cryptocurrency will be subjected to tax-related to Capital Gains, and holders must report the transaction on “Form 8949” and submit it to authorities.

Crypto Taxation:

Following are some of the specific provisions under which the cryptocurrency will be subjected to taxation:

• When one sells the cryptocurrency for other fiat currencies

• When one uses cryptocurrency to purchase product/ services

• When one trades cryptocurrency to sell/purchase other cryptocurrencies

Further, following are provisions under which cryptocurrencies are exempt from taxation:

• When one donates cryptocurrencies to the NGOs, charities, and other organizations which enjoys the benefits of tax exemption

• When one transfers the cryptocurrencies from his/her one wallet to another wallet

• When one purchases the cryptocurrency using fiat currency

• When one gifts the cryptocurrency amount below $15k

• When one stake/lend his/her digital coins to other people

• When one receives the cryptocurrency from the activities like mining, airdrops, and hard forks

Filing the Crypto Return

It is to be noted that cryptocurrency gain from various events such as hard forks, airdrops, mining, etc., is seen as an event of achieving the regular income though one must mention this income in their tax returns. It is only when you sell the cryptocurrency received from these events that you will be subjected to tax-related to Capital Gains. Also, taxation authorities in the US have made it mandatory that anybody holding foreign exchange more than $10,000 must report these assets according to the guidelines set under FATCA and FBAR.

Crypto Tax Calculations:

The calculations related to the determination of capital gain tax from the cryptocurrency are not a very complex procedure. Take, for instance, a situation where you have purchased cryptocurrency, and with time, its value appreciates, thereby accruing monetary profit to your account. This profit or gain will be treated as capital gain and hence will be subject to capital gain tax. On the contrary, if there is a situation when the value of the cryptocurrency depreciates and you accrue the losses, the value will be deducted from other gains on capital to reduce overall tax liabilities you have towards authorities ultimately.

Long-term and Short-term Gains:

The time also has a significant impact on determining whether you need to file short term capital gain tax or long term capital gain tax. If you purchase the cryptocurrency and sell it within a year of purchase, the profit/loss will be considered under short term gains.

However, in case the cryptocurrency is held for more than one year, the tax will be considered on a long-term basis, and accordingly, you will be subjected to any of the three rates applicable on long term capital gain tax 0%, 15%, and 20%. As long term capital gain tax is lower than the short term capital gain tax, it is advisable and recommended that you should hold onto cryptocurrency at least for a year to realize the benefits of the low rate of income tax.

Recording Transactions:

It is important to note that you need to carefully record every transaction related to cryptocurrency as they have to be filed on “Form 8949.” Without the proper record of the transactions that involve date, time, amount, and cost related to digital coins, it will be difficult to furnish information. Also, as the process of filing crypto tax is a bit complicated, you can take the help of multiple software available in the market specifically designed to help cryptocurrency owners file their income tax.

Capital Gain Tax:

The real problem with the calculation of capital gain tax is to find a difference between the purchase price and the selling price of the cryptocurrency. The difficulty arises when you have made multiple transactions to buy a particular cryptocurrency, say Bitcoin. You need to keep a record related to all these transactions; however, recording which Bitcoin has been purchased at what price is tough. To overcome this issue, one can use FIFO and LIFO accounting methods though the former is preferred owing to its simple and uncomplicated procedure. That’s not to say that the latter is not useful; the only thing that LIFO is a bit complex and requires considerable effort.

Conclusion:

In sum, the issue of cryptocurrency taxation is in its infancy, and the ever-evolving nature of digital coins has made things a bit tricky and difficult. However, if you keep the record of digital transactions carefully, then you can easily calculate the crypto taxation procedures. You can also take the help of experts, including tax filing software, to file your returns accurately.