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How Criptocurrencies Can Be Taxed And How To Avoid Becoming A Victim Of Tax Evasion?

by Pralines and Cream 3 months ago in cryptocurrency

Here's how...

How Criptocurrencies Can Be Taxed And How To Avoid Becoming A Victim Of Tax Evasion?
Photo by Kanchanara on Unsplash

People have been wondering how cryptocurrencies can be taxed. And as cryptocurrencies gain popularity across the globe; governments are trying to understand them and create laws. Let’s find out if Cryptocurrencies can be taxed? And how to avoid becoming a victim of tax evasion?

How are cryptocurrencies taxed?

While there is no consensus on whether the U.S. government will consider Bitcoin as a currency or an asset, most people are trying to understand how it would affect their taxes. Although the U.S. IRS has not yet released any official tax guidance on this topic, some other countries have made it clear that they recognize cryptocurrencies as actual currencies and circulated regulations that apply to them as such.

The IRS considers cryptocurrency to be property and not a currency, which means it is subject to capital gains taxes rather than income taxes.

The Internal Revenue Service (IRS) considers cryptocurrency to be property and not a currency, which means it is subject to capital gains taxes rather than income taxes. This is the same way that stocks or bonds are taxed. This also establishes some of the most important guidelines for those who have invested in cryptocurrencies because they must report all of their crypto-related capital gains and losses on their annual tax returns.

Cryptocurrencies are only taxable when they are exchanged for other currencies, goods and services. So if you purchase Bitcoin with U.S. dollars, you don't have to worry about being taxed until you trade those coins for something else down the line — even if their value increases significantly in between now and then.

Taxing digital coins in the USA

The United States Internal Revenue Service (IRS) has finally started to pay attention to cryptocurrencies. At the end of 2016, the IRS issued a guidance about how digital coins should be taxed. In general, cryptocurrency is viewed as property (like stock), and transactions of this kind are subject to capital gains taxes.

According to the IRS, if you sell or spend cryptocurrency, it is a taxable event. If you hold the crypto for more than one year before spending it, you will get long-term capital gains rates — which are lower than ordinary income tax rates. For example, if you're in the 25% ordinary income tax bracket and sell cryptocurrency with a $5,000 profit, you could owe $1,250 in taxes. But if you held that same crypto for more than a year before selling it for a $5,000 profit and were still in the 25% ordinary income tax bracket, your capital gains taxes would only be $1,250.

This is important since many people have been ignoring these rules and are not paying any taxes on their crypto holdings.

Taxation of digital money in the EU

The EU is striving to control the cryptocurrency market, and it is taking a number of measures to do so. The European Commission has already proposed the introduction of anti-money laundering regulations for cryptocurrency exchanges and wallets, and now it is working on new tax rules for virtual currencies.

According to the official information published by the European Commission in March 2018, a new directive was drafted which would change the way digital money is taxed in the EU.

According to this document, cryptocurrencies are currently not considered as financial instruments and are therefore not subject to any special tax regulations. This means that they are taxed in accordance with the national legislation of each member state of the European Union.

However, the new draft directive will impose requirements related to VAT (Value Added Tax) on digital money. In particular, crypto-exchange services will be treated like fiat money exchange services, and transactions with cryptocurrencies will be treated like any other goods or services purchased online.

In addition, there are plans to include in the directive some provisions concerning taxation of income from activities related to cryptocurrencies — mining, trading or selling digital coins. The new rules should also make it possible for member states to apply capital gains taxes when profits from trading cryptocurrencies exceed certain amounts.

By Kanchanara on Unsplash

Cryptocurrency trading tax evasion schemes

On the one hand, it seems simple. On the other – not quite.

The problem is that no one in the cryptocurrency industry has any clear idea of how to deal with many issues related to taxation at this stage. For example, there are different countries and jurisdictions in which cryptocurrencies are treated differently. As a result, many traders get confused.

According to the report from Ernst & Young, Bitcoin transactions can be taxed in at least three different ways: as property, as currency transactions and as financial transactions.

In some countries, such as Germany and Singapore, virtual currency is considered to be a legal means of payment. In this case, it is possible to tax Bitcoin for VAT purposes.

In other countries like Russia, Ukraine or Belarus cryptocurrencies may be considered as property and cannot be used as a means of payment. So, in this case trading with crypto assets can be taxed only when capital gains are realized or when their value increases by more than 10%.

However, we will not talk about these specific cases today. Instead, we will focus on some general rules that most countries follow when it comes to taxing cryptocurrencies and crypto trading activity.

How to avoid becoming a victim of tax evasion when trading cryptocurrency?

Cryptocurrencies are gaining traction rapidly in the world economy, and governments are having a hard time keeping up. The IRS classifies cryptocurrencies as property, which means that they must be taxed according to the rules of real estate.

The problem with this classification is that cryptocurrencies can be used for different purposes — buying and selling goods or services, trading or simply holding onto them for speculative purposes. Each of these activities has a different tax implication.

Here's a look at how cryptocurrencies are taxed and how you can avoid becoming a victim of tax evasion when trading in cryptocurrency:

How Are Cryptocurrencies Taxed?

Cryptos are taxed as property by the IRS. This means that they are treated like commodities such as stock or real estate and subject to capital gains taxes. These taxes apply to both short-term and long-term gains in value. Short-term capital gains are taxed like ordinary income, which means that your profits will be taxed at your marginal tax rate if you hold a crypto for less than one year. Gains from investments held for more than one year will be subject to lower long-term capital gains rates. In general, rates range from 0 percent to 23.8 percent depending on your income bracket (or tax bracket).

To conclude

Tech geeks who have been paying attention to cryptocurrencies such as Bitcoin and altcoins since their inception knows that proper accounting of all your digital currency is essential for taxes. In fact, there are many countries where cryptocurrency transactions are subject to taxation. It's important to keep in mind the particular tax laws of the country you live in, and make sure that you are meeting all the local tax requirements when it comes to your cryptocurrency transactions. It might also be a good idea to consult a tax professional if you have any questions about how best to report your crypto income and profits on your taxes. Although this information should provide some guidance on how cryptocurrencies will be taxed we recommend checking with a professional for personal advice concerning cryptocurrency taxes. Make sure you stay ahead of the curve and pay all the required taxes!


About the author

Pralines and Cream

Hi there,

I'm Pierre, a freelance writer, serial blogger and speaker who enjoys enlightening others about unknown and little known facts.

I'm also head of Praline and Cream Media, a publishing company that shares sweet knowledge to the world!

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