The Taxation of Cryptocurrency – How Does it Work?

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Recently, US President Joe Biden shocked many crypto investors and enthusiasts with news regarding the further taxation of cryptocurrencies. However, how is the taxation of cryptocurrency occurring currently?

In this article, you will discover how the taxation of cryptocurrency works and how to deal with the entire process. Before you decide to explore cryptocurrencies, choosing to buy BNB, Bitcoin, or other coins, you must learn all about the tax implications of trading and buying/selling.

How is Cryptocurrency Taxed? – An Overview 

In most countries, including the United States, cryptocurrency is treated as property for tax purposes, not as currency. Hence, for tax purposes, investing in cryptocurrencies is much more like investing in stocks or derivatives.

As cryptocurrency is not treated as an actual currency, it means that you will incur capital gains or losses whenever you dispose of that property. In essence, it works the same way as stocks, bonds, real estate, and other types of investment property.

To illustrate the concept, let us say an individual called Bob bought one Bitcoin for a BTC price of $10,000. Two months later, Bob’s investment appreciates to $12,000 and he is selling that one Bitcoin for profit. 

In this situation, Bob has incurred a $2,000 capital gain, of which he owes a percentage of the gain to the government. However, what percentage does Bob owe the government? The answer to this question depends on whether it is a short-term gain or a long-term gain.

Short-term capital gains occur when someone holds an investment for less than a year. On the other hand, long-term capital gains occur when someone holds an investment for more than a year. 

If you enter a short-term operation and end up succeeding, you will be taxed according to your marginal tax bracket. The federal tax brackets vary for single individuals and individuals who are heads of households. 

For example, a single individual who made $50,000 in a year will have a marginal tax bracket of 22%. When someone holds an investment for longer than a year, he/she will be taxed at the long-term capital gains rate, which is completely different from the marginal tax bracket.

Filing Your Cryptocurrency Taxes to the IRS – What Are Taxable Events? 

Whenever someone incurs capital gains or losses in cryptocurrency investment, it triggers a reporting requirement to the IRS (Internal Revenue Service). In this sense, it is crucial to understand what a taxable event is before going forward.

A taxable event refers to any transaction that results in a tax consequence for the party who is executing the transaction. For example, when Bob sold his Bitcoin for $12,000, it triggered a taxable event of $2,000 to the IRS. 

In their 2014 tax report guidance, the IRS lays out the taxable events regarding cryptocurrency investment. Taxable events include:

  • Selling cryptocurrency
  • Trading crypto-to-crypto
  • Purchasing products or services using cryptocurrency

On the other hand, non-taxable events include buying and holding cryptocurrency, as well as cryptocurrency transfers from one wallet/exchange to another. 

To file your cryptocurrency gains to the IRS, you will need to file Form 8949, which is the form used to report capital gains or losses of all types of property. It is essential to pay attention to detail and do not report non-taxable events.

As it is plain to see, to file your tax reports correctly you will need to keep track of your cost basis, the fair market value of the cryptocurrency when you dispose of it, and the capital gain/loss associated with each disposal. 

The New World of Cryptocurrency Taxation – How Are Other Countries Dealing with it? 

On June 5, the G7 – the economic group made up of the United Kingdom, France, Germany, Italy, Japan, United States, and Canada – is defining a new agreement regarding the taxation of cryptocurrencies.

After a meeting in London, the group that reunites the biggest world economies defined that large technology companies will need to pay at least 15% of total profits from operations involving virtual currencies.

However, there is still no set date for the new rule to take effect. The intention is not to target retail investors, but the so-called “big techs”. In other words, the hardest hit will be companies like Facebook, Amazon, Google, Apple, Tesla, etc.

Hence, the amount industry-leading players must pass on as taxes must be at least 15% of their total profits. Even though the whole process of inspecting and transferring the taxes is still not defined, the taxation will certainly be upheld. 

Final Thoughts 

The Biden administration is planning a series of proposed changes to the US tax code, including a plan to nearly double capital gains taxes to 39.6% for people earning more than $1 million, including cryptocurrency investments.

In this sense, it is never a pleasant thing to deal with taxes, but it is crucial to know how they work and how to avoid over-taxation. The taxation of cryptocurrency is still hard to deal with, especially as most related regulations are new in most countries.

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