Generally, if you buy, sell, hold or trade digital tokens, you must pay a cryptocurrency tax.
Over the past decade, cryptocurrency has gone from nothing to everything. People no longer see it as a millennial or Gen Z fad. Bitcoin and other digital tokens are here to stay longer. Although the cryptocurrency market has seemingly been lackluster for some time now, long-time investors are unscathed from the challenges. With tax season over, many of you may have wondered or struggled to pay taxes for cryptocurrency. In this article, we try to minimize your problems by explaining the basics of cryptocurrency taxation and also explaining a way to make crypto tax-free.
Cryptocurrency is the new buzz lately. With over 13,000 digital tokens in circulation, investors are overwhelmed with choices to choose from. However, taxing cryptocurrencies is as important as buying and holding them. When it comes to India, the central government is still debating whether to tax digital tokens or ban them. Although a complete ban is an impossible thing to do, investors are required to pay a cryptocurrency tax. The Indian government also plans to compartmentalize the taxation of cryptocurrencies to make it clear and precise. With the cryptocurrency committee already formed, the Ministry of Finance is expected to come up with a relevant taxation process. However, some countries indulge cryptocurrency investors like El Salvador, Germany, Portugal, Malta, etc. The United States has a different framework for cryptocurrency investors in the country. Therefore, we explain how people usually pay taxes on cryptocurrency putting it under the radar of central governments.
The legality of cryptocurrencies and how are they taxed?
Simply put, cryptocurrency is a digital currency used to buy, sell, or exchange items or money online. Bitcoin is the first digital token resulting from the successful implementation of blockchain. Since its inception in 2009, Bitcoin has gone through many transformations and phases of adoption. But the legality of cryptocurrency remains an unanswered question. Many countries around the world are looking to impose taxes on decentralized support, while India is also on the same track.
In 2018, the Reserve Bank of India (RBI), the country’s leading bank, imposed a cryptocurrency ban by preventing other banks from taking money for crypto exchanges. Fortunately, the ban was later overturned by the Supreme Court. So far, neither the Ministry of Finance nor the Income Tax Department has come up with an effective strategy. This does not mean that Indians can trade cryptocurrency, profit from it, and yet not pay taxes. There is still a huge debate over whether to consider cryptocurrency as a “currency” or an “asset”. The UK and the US have come up with a solution to label it as an “asset”, as it is not on the government’s radar to be called a “currency”. India, on the other hand, considers assets held for more than three years as long-term assets and the rest as short-term assets.
In general, the profit that investors make from the sale of a cryptocurrency is taxed in India. Currently, as there is no clear vision, investors clearly pay taxes on their profits in the country.
What are cryptocurrencies taxed on?
Cryptocurrency is not a single window frame to clearly add tax on its profits. It has different channels and from generating a cryptocurrency to selling it, many processes are involved. Therefore, taxation of cryptocurrencies should provide rooms for each of them.
Cryptocurrencies are primarily generated through a process called “mining”, which helps create digital tokens. Miners solve complex algorithms, codes or equations on the blockchain to unlock the code and get their hands on the digital tokens. On the other hand, people buy cryptocurrency from exchanges using fiat currencies and store them in wallets. Finally, we have the sell phase where investors potentially report profits. However, there are chances that they will suffer a loss as well.
What is the scenario in the United States?
In the United States, if you buy, sell, or trade cryptocurrency, you are liable for tax. The IRS requires every cryptocurrency user to pay a fee for using their digital tokens, and crypto exchanges like Coinbase make transaction history available for this purpose. Since the country identifies cryptocurrency as “property” and not “currency,” U.S. cryptocurrency investors are required to follow the same property tax regulations.
The only way to get out of the crypto tax
This provision is reserved for US cryptocurrency investors who use the IRA (Individual Retirement Account). Generally, the IRA allows Americans to save for retirement by holding cryptocurrency assets. They are designed to reduce taxes and, in turn, encourage saving for retirement. While traditional and Roth IRAs don’t allow cryptocurrency holdings, users can still add it as part of “ownership” agreements.
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