Cryptocurrency is one of the most liquid assets that you have in your kitty. Its gigantic nature puts it in the league of property as per the US Federal Laws. So, the first thing to know about taxation on cryptocurrency is that it will attract the tax just like the property you own. Any transaction that you do concerning cryptocurrency like Bitcoin or Ethereum will apply the same taxation principles as applicable in the property transactions.
The truncation mainly happens between converting the cryptocurrency into a fiat one and vice versa. You must know that there are a few different types of transactions involving cryptocurrency that would save you from being taxed.
Transactions which attract tax
Cryptocurrency taxes come into picture when you have done the following transactions:
- Sold cryptocurrency to get dollars
- Paid for goods and services using cryptocurrency
- Selling one cryptocurrency to buy another one
There is a substantial amount of capital gain earned in these transactions which make these exchanges eligible for the taxation procedure. Not all transactions result in capital gain. Using cryptocurrency for some good cause and certain other types of expenditures makes the whole transaction tax-free. Such transactions are:
- Using cryptocurrency for donating to organizations and charities declared tax-exempt by the Government
- Purchase of cryptocurrency using fiat currency
- Moving cryptocurrency into various wallets belonging to you
- Cryptocurrency received by the way of airdrops, mining or blockchain forks
- Lending the crypto coins or putting them on stake
Capital gains – what amounts to these
Capital gains are nothing but the difference between the selling value and purchasing value of the cryptocurrencies. These can be short-term or long-term gains. The short-term capital gains come into picture when you buy any asset and sell it within one year of purchase. It attracts more tax as the amount is calculated at higher rate than that applicable in the long-term gain. Thus, it is advisable to hold the cryptocurrencies for at least one year after buying to avoid heavy taxation. The gains are declared using form 8949.
All capital gains are clubbed under one head and the profit on one is set off against the loss on the other and then the final payable amount is found out. For example, if you are selling a house on humongous profit in one year and sold the cryptocurrency at a loss in the same year, the profit margins of the property and loss in cryptocurrency are accounted together to arrive upon the applicable tax. To know more about the transactions that result in capital gains and how to calculate total applicable amount, one should refer to a lawyer.
Calculation of profits
Cryptocurrency does not keep trending at the same price. The price definitely fluctuates. There are three methods to find the profits -FIFO, LIFO and Specific ID. Use the crypto tax software to keep yourself from the hassles of learning about the calculation. However, you must know which one of these methods are legal in your area and whether the software is complying to the specified regulations or not.