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Taxation of cryptocurrencies

26.10.2021
Taxation of cryptocurrencies

How Is Cryptocurrency Taxed?

Nowadays, the cryptocurrency market is fast-growing and developing as well as attracts a huge number of users to make investments or make the transaction in cryptocurrency. Therefore, if you are the holder of any type of cryptocurrencies like bitcoin, altcoin, or tokens, you should know how it is taxed and what obligations you must fulfill when buying, selling, or mining it.

What is Cryptocurrency?

A cryptocurrency is a virtual currency that is analogous to fiat money. This currency is protected by cryptography so that it is almost impossible to spend twice or use counterfeit coins. One more advantage of this type of currency is that government authorities do not control it. Cryptocurrencies are absolutely safe because all transactions are carried out due to a continuous sequential chain of blocks called the blockchain.

The very first cryptocurrency in the world is Bitcoin, which was issued by Satoshi Nakamoto in 2008. Its popularity and rapid growth have led to the fact that many developers began to issue new types of coins, which are called altcoins and tokens.

All coins that were created after bitcoin are called altcoins. They were issued to create an alternative to bitcoin. That is why they are also called "alternative coins”.
The most famous among these types of coins are Litecoin (LTC), Ethereum (ETH), Ripple (XRP).

Tokens are digital assets. These coins do not have their own blockchain, so they are installed on the blockchain of Ethereum, Omni, Neo, Tron.

All of these coins were created to one degree or another in order to provide users with faster and safer transactions and to correct the shortcomings that cryptocurrency has. For example, the developers of the DBX token were able to solve two main problems associated with cryptocurrencies — their volatility and the possible risks of tightening regulation of cryptocurrency by the government authorities.

All these were being achieved as a result of the DBX tokens are installed on multiple blockchains such as Quark and ERC-20 blockchains, which have been significantly improved by the DBX team.

Taxation of cryptocurrencies

According to the IRS ruling from 2014, cryptocurrency is considered a capital asset like bonds or stocks rather than a currency (fiat money).
This decision has serious implications for people who own cryptocurrencies, leading to a more complex taxation system. The tax is levied on capital assets if they are sold to get a profit. When you buy goods or services with cryptocurrency and the amount of cryptocurrency that you spend has increased in value compared to what you paid for it, your expenses are subject to capital gains tax.

According to Jeff Hoops, an associate professor at the University of North Carolina and research director of the UNC Tax Center, The fact that the IRS decided to tax cryptocurrencies as a capital asset could be because many people hold digital currencies as an investment.

From these words, we can conclude that this was a pragmatic decision to tax on crypto as capital assets because the cryptocurrency began to have trading volumes of millions of dollars every day, and IRS couldn't miss out on a significant source of tax revenue.

However, there are several positive sides. For instance, you only have to pay taxes if you spend or sell crypto and make a profit. If you spend or sell your digital coins at a loss, you do not have to pay any taxes on the transaction.

How much do you have to pay your taxes on cryptocurrencies?

The amount of your cryptocurrency taxes are based on different aspects like your annual income and how long you have held your cryptocurrency.

If you own cryptocurrencies for less than one year before you spend or sell them, any profit will be considered short-term capital gains taxed at your regular income tax rate.

In the case you are an owner of the cryptocurrency for more than one year, any profit will be considered long-term capital gains that are taxed at a lower rate, defined by your annual income.

If you receive cryptocurrency by mining it or as a promotion as well as pay for different services or goods, it is considered a regular tax on income. You have to pay a tax on the entire cost of the cryptocurrency at your regular income tax rate on the same day when you received it.

By the way, if you get a cryptocurrency from these activities and spend or sell for a higher price than you first got them. You have to pay short-term capital or long-term capital gains taxes on the profits, depending on the period of time you hold it.