Cryptocurrencies and decentralization might be a recent concept, but it is something that has amassed the attention and likeness of common people and financial enterprises alike. Many governments, states, and countries out there are not only acknowledging cryptocurrencies but also making them a legal tender in their own territory; El Salvador is a bright example of that. If you have dealt with cryptocurrencies in the past, then you already know that in some countries, these are subjected to taxation. It means that when you buy cryptocurrencies, sell them or use them in a dedicated transaction; you would have to pay a certain amount of tax for that transaction as required by the state or government under whose jurisdiction you are interacting with the crypto market.
It might feel a bit ironic given the fact that cryptocurrencies are a decentralized entity which means that no one state, government, and enterprise has any say in what policies are developed for these cryptocurrencies and how these transactions are completed. But when it comes to taxes, why some people are subjected to them?
The very reason why is regulatory environment of that specific country or state allows the centralized financial systems to take a small amount of chunk from the decentralized side in terms of taxes is because they are allowing crypto businesses to thrive and take place on their soil. If you are receiving cryptocurrencies as payment, then you would have to pay a certain amount of income tax on that.
Don’t panic; every jurisdiction and state has its own rules and laws when it comes to cryptocurrencies. You might not have to pay even a single cent no matter how big a transaction you make in crypto, or you might have to pay a whole lot of money even on a manual transaction. It changes from country to country and jurisdiction to jurisdiction. To be able to understand properly if the prospect of taxation concerns you, you must consult with your tax advisor.
You might not like it, but the taxation authority often conducts business with crypto exchanges to track the movement of these cryptocurrencies for the sake of manipulating their taxes on their use, selling, or purchase. You might have initially thought that because you are interacting with cryptocurrencies and they are completely decentralized, you would be out of the clenches of the government, but that simply is not the case. There are financial penalties questions; if you try to evade taxes on crypto, depending upon the type of evasion that you have done, there might be strict punishments in order.
Introduction to Crypto Taxes
HODL (hold on for dear life) is a crypto term that you might have come across many times while dealing with crypto trading, and it means that when you invest in a certain cryptocurrency, you wait out to see if the price for that crypto is going to increase? What would be the time frame that you might have to wait out for, and what about the turns of the market? So, what you do here is nothing, you don’t sell your position and wait it out, and if you do that, you have to pay taxes when the price actually goes up, and you make a nice profit.
But on the other hand, if you don’t make a profit on your initial investment and have incurred a loss, then obviously there are no taxes to pay in here. The amount of tax that you owe to the authorities might change from territory to territory and jurisdiction to jurisdiction, but a common practice has been established where taxation authorities now treat cryptocurrencies the same as capital assets.
You must get everything right about crypto taxes because if you don’t, then you would be stealing from the state, and that is not a minor crime in any capacity. A word to the wise here is to consult with a proper tax professional that is local, which means that they will know the present rules and laws and will be able to help you with the whole crypto taxation scenario in a more appropriate way.
Crypto Taxes Vary from Country to Country
As explained many times before, the prospect of you paying taxes to the authorities depend upon your location and the present rules and regulations around crypto taxation in that specific place. You might have to pay a lot, and you might not have to spare even a single cent, but all of that is subjective. There are many factors that need to be taken into account to properly analyze the whole situation and to know if these taxes apply to you or not.
It will depend on the type of activity that you are commencing; if you only HODL, then obviously the law of the crypto tax applies to you, and you have to pay a specific percentage on the profit that you made selling your crypto for way more than you originally invested. Remember, crypto taxes don’t apply to you when you are buying a certain cryptocurrency; that is never the case. These only apply to you once you are planning to sell them and on a profit. Remember, if you don’t sell your crypto at a profit, then there will be no tax that you owe to the authorities whatsoever.
There is a loophole here as tax authorities and regulators are still trying their best to understand the whole thing and develop a proper scenario and framework that they can use for the sake of incurring taxes on the purchases made by crypto and the profit that investors and traders generally make off of the market.
There is no proper time frame in question presenting us with an end date when these regulations will be completed, and a more rigid and upfront crypto framework could be developed. You can’t frown on the government or any taxation authorities for not filling you in for the taxes that you owe. As an individual trader or investor, it is solely your own responsibility to square the whole thing and know just how much tax you have to pay; that is why it is always best to consult with the local tax professional so that you can get the best advice there is.
What are Taxable Events?
Another term that is thrown out more often in the crypto community is a taxable event. If you interacted with any transaction or crypto-related event, then you are obliged to pay taxes here. As explained earlier, a taxable event in one country or state might not be a taxable event in another. The rules are different; the regulations are being banded together at the moment, and therefore there exists this huge disparity when it comes to crypto taxes among various countries and even states of the same country. Only the transactions that involve the selling of cryptocurrencies or commodities are termed as a taxable event; other than that, every capital asset out there is taxable.
When you are buying a cryptocurrency from a dedicated exchange using fiat currency, you might not be subjected to any taxes whatsoever. At the same time, trading on crypto and earning a solid return in the future is something that is a taxable event. In some countries or states, it doesn’t matter; even if you have made a profit or a loss on your market position using crypto, you are entitled to pay taxes. It means that if your trade ends up in profit, you will be paying taxes because you have made capital gains.
On the other hand, if your position ended up in a loss, then you have incurred capital loss, and you would still be paying taxes. It is quite complicated to understand when or why you are obliged to pay taxes with crypto, but one thing that we were able to develop from all of this is that you are only obliged to pay taxes if you make a profit on your trade or when you are selling your assets. Your local tax authority is going to play a massive role in determining whether or not an event is taxable. In some places, you might be able to reduce the overall tax that you have on a certain transaction which eventually ended up in a grave loss.
A taxable event might have many forms and examples. For example, if you are selling your crypto to get fiat currency, maybe Euro, American dollar, or Japanese yen, then that is a taxable event. When you are trading one cryptocurrency for another one, that is also a taxable event. Other than that, when you are using your crypto for the sake of buying products or availing certain services that ended up routing some profit for you, then yes, you owe tax to the state. That is also a taxable event when you receive cryptocurrency as a reward from mining or some other activity because it is a capital gain.
There is a huge battle raving about this issue as many believe mining should be discarded from the list of elements on which taxes are stomped because it is something that doesn’t involve putting down an investment first and is purely service-based. A person is just chipping in their computational power for the sake of helping in the validation of transactions and gaining a practical reward for the time and energy that they have spent, and it should not be subjected to any taxes whatsoever.
To gain some perspective on a non-taxable event, there are a few examples of that as well. When you are buying crypto using fiat currency, then that event is non-taxable until you sell your crypto and make a profit on it. When you are donating crypto to an organization that is exempted from any tax, that is also a non-taxable event. When you are gifting crypto to your loved ones or anyone for that matter under a proper limit set by the authorities, that are also a non-taxable event. When you are transferring crypto from one wallet to another, and you own both of these wallets, then that is also a non-taxable event. These examples are just provided to you to gain some perspective on what or what might not be referred to as a taxable event within the crypto space.
How Is Cryptocurrency Taxed Around the World?
At the end of the day, all of it comes down to the classification of crypto in a dedicated country and the regulatory framework that they have around the crypto space. If crypto is legal within a country and it is widely adopted among the people in the state equally, then there won’t be any heavy taxes imposed on crypto assets as compared to those areas where its acceptance is questionable. For most of the taxation authorities out there, crypto is capital gain and not a currency and therefore is imperative to taxation.
If there doesn’t exist a proper framework around crypto taxation in your own country, then it only means that the crypto will be taxed as any other capital asset gain within the country. This setting will remain in effect until a proper framework is developed and there are subtle taxation laws in place throughout the region. Many countries out there use a much simpler approach when it comes to taxes, as in Germany, you don’t have to pay any tax on your crypto assets for over a year; after that time has passed, your assets or capital gains will be incurred to taxation.
There is a new trend in the air where people are actually requesting the payment of their salaries in crypto, it might sound a bit progressional or even trend setting, but in reality, it is not. Because if you are getting your salary checks in crypto, then those are liable to heavy taxation. And this goes other than the income tax that you have already paid. Therefore it is not a subtle approach to ask for your payment in crypto, especially if your country has a pretty rigid taxation scheme regarding cryptocurrencies. The tax that you would owe to the government will depend on the amount that you have earned.
The same approach needs to be brought in a bracket wise situation, such as if you’re promoted at your job following a hefty increase in your overall salary and given the fact that you are actually paid in crypto, the amount of tax will also increase as your role within the enterprise changes and you are offered a much bigger salary. Furthermore, it is important to understand whether your situation applies to capital gains tax or income tax because you won’t be paying both, and that is a relief, but you need to know which one applies to your scenario in a more appropriate way so that you can better prepare yourself.
Role of Tax Authorities
Humans are passionate creatures, and they want to save themselves from any practical calamity at any cost. That is why many would be looking for ways to ditch the taxes, but taxes are paramount and imperative. Everyone knows that taxation authorities take a keen interest in knowing how much people earn so that they could be taxed properly and there wouldn’t be any source of incompatibility. IRS, HMRC, and many taxation authorities around the globe take a proper interest in crypto transactions and offer a much more rigid framework enforcing tax compliance.
Many crypto exchanges are also helping the authorities collect the most recent data when it comes to transactions and people who are involved in this. That is why they know everything there is to know about taxation, how much have you transacted over a certain period of time, and everything there is to know about you and your business with crypto. Many states use the analytic tools to exactly measure the number of crypto people who have transacted and the number of people who are actually in business with crypto, to begin with.
If proper information can be rounded up, then the tracking of blockchain-related transactions could become a bit easier and moving on, it wouldn’t remain much of a hassle to reach the personal crypto wallets of people and extract all the information the government needs to propagate sophisticated taxation principle to those specific users.
In most countries, you are required to file your taxes regarding cryptocurrencies you owe in a consistent manner, or else there will be penalties and possible incarceration in effect if you fail to oblige with what you owe. It is not all the time that you owe taxes on crypto because sometimes you might owe nothing at all and even would be subjected to a refund by the authorities. So whatever suspicions you have in mind and things that you have drummed up to save yourself the hassle of finding your property taxes, get them out of the way and file your crypto taxes today.
