It is no surprise that more and more people are turning to cryptocurrency. Digital assets like Bitcoin are worth thousands of dollars per unit, and the list of things we can do with them only seems to get longer each year.
For example, more of us are investing in cryptos, hoping to make a profit. New tokens hit the market every day, and as Kane Pepi writes, investors constantly turn to resources like the new binance coin listings 2024 for inspiration. That’s even before we look at other use cases like gambling and buying goods and services. With all these comes the question of taxes. Most of us know how taxes work in the context of fiat currency but how does this manifest with crypto?
The Legal Status of Crypto
Before delving into crypto taxation, the first thing to understand is how it is recognized in the eyes of the law. After all, the government will treat crypto the way it sees it. The truth is that crypto’s legal status depends heavily on the country in question.
In some countries, crypto is recognized as a legal tender in the same way fiat currency is. El Salvador and the Central African Republic recognize crypto as legal tender, and it is believed that others will follow suit. There are also many countries like the United States and the United Kingdom where crypto is not seen as legal tender but is perfectly legal to use. Finally, crypto is illegal in some countries, such as China and Morocco.
This is important as a country where crypto is legal tender is more likely to have robust tax laws in place. On the flip side, a country where crypto is illegal will probably have zero laws in place.
How is Crypto Taxed?
In most countries, crypto is not legal tender but is legal to use. In that case, it will be subject to taxation in certain situations. One of the most common taxes applied to cryptocurrency is capital gains tax. This is because crypto is typically treated more as an asset, like a stock, than a currency, thanks to its fluctuating value.
If a person or a startup business, for example, were to buy a Bitcoin token at $50,000, you wouldn’t immediately be subject to capital gains tax. If the price were to increase to $60,000 and you sold it, you would have to pay tax on your profit.
This is the case in places like the UK, which charges between 10% and 20% on transactions. Everything from trading crypto for crypto/fiat and even gambling with digital assets is classed under asset disposal and, thus, taxed. Another scenario where crypto is taxed is if you receive it as an income from your employer. In that case, it is subject to the same income tax you’d pay for fiat currency.
If you mine crypto, you’ll also have to pay taxes associated with self-employment. Interestingly, you’re likely to be taxed if you spend cryptocurrency on a good or service, as this falls under disposal.
Even with all of these, there are some scenarios in which you would not be taxed for using crypto. Giving or receiving crypto as a gift is not subject to tax the same way fiat cash gifts are not.
You also don’t need to pay crypto if you transfer it from one of your wallets to the other. Donating crypto to a charitable organization is not taxed; in fact, you may be able to claim it as a tax-deductible donation. Buying cryptocurrency and holding on to it is not taxable as you have technically not disposed of the asset yet.
So, as you can see, crypto transactions are taxed or not, depending on what they are.
How to Navigate Crypto Tax
Paying tax on your crypto is very important these days. Just like with fiat, you can be punished by the law if you fall behind, and many countries are taking the matter much more seriously. If you’re looking to keep on top of your crypto tax, here are a few things to keep in mind:
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Record Your Transactions
To ensure you pay the right amount of crypto tax, you must record every transaction you complete using the asset class. The good news is that by visiting your crypto exchange of choice or even the dashboard of your crypto wallet, you can view and even download your transaction history. These will include the crypto in question and how much it was worth when received and disposed of. Hold on to these records, as they will be vital.
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Familiarize Yourself With the Law
Tax laws, including crypto ones, vary from place to place. To avoid ending up on the wrong side of the law, read up on how crypto tax is enforced in your country. Don’t make assumptions, and ask questions if you need clarification.
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File Taxes Accordingly
Once you know the crypto tax rules where you live and have recorded all your transactions, ensure you file your crypto taxes when they are due and according to regulations. Do not be late in doing this, as it can attract penalties. There are online guides that will guide you through the process, so feel free to take advantage of them.
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Get Professional Assistance
Taxes can be very complicated, but crypto taxes are even more so. If you feel that you’re getting overwhelmed or simply want to make things easier, feel free to hire a tax professional experienced with crypto. They will easily review your transactions and guide you through the process. And while this costs money, it is likely worth the price.
Conclusion
Crypto taxes are a more relevant topic than ever before and one you must pay attention to if you plan to comply with the law. As we’ve said in this article, crypto is subject to tax under certain situations, and you’ll have to navigate them if they apply to you.
