Taxation of Cryptocurrency
Digital currency has quickly gained traction within recent years, accumulating a total market capitalization of $1 trillion. This has led many crypto traders and enthusiasts to ask tax-related questions regarding their digital investments. If you have held onto your Crypto and accumulated a sizable net worth, you may wish to convert the capital gain within your digital wallet into actual currency that can be used to buy goods and services.
I. What Is Cryptocurrency?
Cryptocurrency is virtual or digital currency that is able to circulate without the need for a central monetary authority, such as the government or a bank. They are created using cryptographic techniques that allow people to buy, sell and trade the currency securely and anonymously.
Due to the fact that cryptocurrency is not formally backed by the government, some people are quick to assume that it would be subject to less regulation that fiat currencies, like the dollar or euro, are subject to. However, you should be prepared to pay some taxes on your virtual investments for the upcoming tax season.
II. How Is Crypto Being Treated For Tax Purposes?
In the United States, crypto exchanges must report user activity of gains and losses to the IRS. Meaning, cryptocurrency is taxed in the same way as a traditional stock or security would be taxed. Since cryptocurrency is considered property, it is subject to capital gains when exchanged or sold at a profit.
Since the digital currency is treated as a capital asset, the crypto taxes you pay are the same as the taxes you may owe when realizing a gain or loss on the sale/exchange of another capital asset.
III. How To Calculate Taxes When Buying/Selling Cryptocurrency?
It is not enough to simply compare your net proceeds to your cost basis when figuring out how much you owe in crypto taxes. When you are buying and selling cryptocurrency, you must consider the length of time you held the asset, as this will determine if your capital gain or loss is considered “short-term” or “long-term.” The type of capital gain will determine how much you will have to pay in crypto taxes.
IV. How To Use Cryptocurrency To Pay For Goods/Services?
You will eventually want to convert your virtual currency into actual currency, in order to pay for goods and services. With traditional fiat currencies, you are able to simply pay for a purchase without having any tax-related consequences associated to the value of the currency at the time of payment.
However, with cryptocurrency, users deal with capital gains and losses in addition to sales taxes that are associated with purchase at the point of sale.
One of the biggest challenges for crypto traders is that many investors have trouble keeping records of these transactions, including the capital gains and losses or everyday transactions. However, if you are able to keep these transactions organized, cryptocurrency can become a possible replacement for fiat currency altogether.