Crypto Tax Guide: Everything You Need To Know

Introduction

Cryptocurrency investors have to take care of a lot of aspect when trading. This article takes a deep dive into cryptocurrency taxes and how to calculate them.

Understanding Crypto Taxes

The cryptocurrency market is a multi-trillion dollar industry. Many investors convert their savings into cryptocurrencies as a form of asset allocation or portfolio diversification.

However, government institutes are always worried about foul play and tax evasion regarding crypto investors. Therefore, the federal taxation authorities in every country have imposed taxation laws for crypto investors.

For example, the Internal Revenue Services or IRS brought cryptocurrencies under taxation laws in November, 2014. Since cryptocurrency markets are a borderless investment plain ergo the investors should check with the federal taxation authority in their region to check the levied taxes.

Why Do You Need to File Cryptocurrency Taxes?

The main reason for filing cryptocurrency taxes is that it is mandated under the law. Tax evasion is often characterized as a serious offense in all sovereign nations. There are many cases where regulators speculate that cryptocurrencies are used for illegal transactions such as money laundering.

Therefore, regulators design policies and regulations to monitor cryptocurrency transactions as a way to prevent any sort of illegal activities.

At the same time, regulators have also sought to impose taxes on cryptocurrency trading much like stock or commodity trading alternatives. Blockchains are decentralized and automated but cryptocurrency exchanges continue to become more regulated.

How to Avoid Paying Taxes on Cryptocurrency?

There are some ways for cryptocurrency investors to avoid paying taxes on their cryptocurrency trades. The most ideal way for investors to save taxes is to learn about the taxation laws in detail.

At the same time, there are some cases where investors may move to jurisdictions where taxation laws are relaxed or friendly.

Another important factor to keep in mind is to keep track of all the cryptocurrency sales and purchase records.

Furthermore, there are some scenarios where taxes do not apply on crypto transactions for example when giving them as gifts or donating. However, it is important to find out the maximum amount that is allotted as tax free for donation and gifting purposes.

How to Calculate Crypto Taxes

It depends on the laws of the native cryptocurrency investors to ascertain how much taxes they have to pay. However, as a baseline rule here are some general guidelines when taxes are applied to cryptocurrency investors:

Capital Gains Taxes on Cryptocurrencies

Capital gains tax is applied on cryptocurrency investors on the profits they make on their trading positions. In general, short-term trading positions are subjected to higher taxes meanwhile long-term carry lesser tax implications.

Capital gains tax is applied to an investor when they convert their crypto holdings to cash or other cryptocurrencies such as stablecoins or others. The percentage of capital gains taxes for short-term and long-term investors depends on the jurisdiction they are present in.

Income Taxes on Cryptocurrencies

Income taxes of cryptocurrencies are applicable when cryptocurrencies are issued as payment. Employees can receive their salary in the form of cryptocurrencies and in other instances online merchants may collect digital assets as payment for their goods or services they also have to pay a portion of their revenue as income tax to the relevant government officials.

Commercial entities have to pay taxes on their revenues based on business income requirements while individuals can make do with retail taxes.

Crypto Tax Write Off

The reality of cryptocurrency investing is that it has considerable chances of losses. However, the misfortune of taking losses can be used in a constructive manner to use it as tax write-offs.

At the same time, investors may also be able to avail tax exemption by donating a considerable part of their income to charities. Cryptocurrency investors can hire a professional tax consultant or accountants to calculate their taxes. Some people also hire legal experts to help them minimize their tax obligations.

Conclusion

Cryptocurrency taxation is an important and necessary aspect of trading. Every investor should pay a lot of attention to it in order to avoid any legal penalties.

Investors can always log on the official websites of their federal taxation agency to calculate and file for their cryptocurrency trading taxes.