Everything You Need to Know About Cryptocurrency and Taxes

The crypto-sphere is a sphere that has quite a few volatilities and vulnerabilities. And though, the sphere promises a lucrative return on investments and an exponential growth over the next few years, there is also one intriguing factor that not much people know or talk about. Investing in cryptocurrencies does not mean that one has been exempted from taxes. There is a whole world of information that you are missing out on if you are under the same impression. The ways in which cryptocurrencies work are complex. From the blockchain network to the ways in which taxes function, cryptocurrencies are a complicated affair. Therefore, we might as well get down to looking into some of the basics of this domain and understand everything about taxes when it comes to defining the cryptocurrency.

Using Cryptocurrencies- What does it mean for taxes?

Let us first try to understand how cryptocurrencies work before getting into the details of taxes. If you have been using cryptocurrencies, you already know what you are in for. However, if you are still uninitiated to the affair and are considering transacting in these currencies, here is what you need to know. Cryptocurrencies are digital currencies, like Ethereum, Litecoin and Bitcoin, which are of course, virtual in nature and are stored in a digital wallet. There are QR codes that need to be scanned for a transaction using these coins to go through. Plus, the transactions can only occur when both parties use cryptocurrencies. Also, an interesting fact to understand here is that though the cryptocurrency is represented in the form of coins, there is no physicality associated with it. Everything happens on a digital platform. The transactions go through the blockchain network and data that enters this network is deemed immutable at once. This is also the primary reason why investors are keen on investing in these currencies. There is a minimal chance of fraudulent activity with the blockchain network in place.

So now that we have wrapped our heads around the basics of the cryptocurrencies, we need to understand what exactly it means for taxes.

As Property-

Not paying taxes related to the transactions using cryptocurrencies means that you are not in tandem with the regulations of the IRS or the Internal Revenue Service. Using cryptocurrencies does not mean that you can evade taxes. In fact, a failure to do so can lead you to be penalized heavily. IRS considers the cryptocurrency as a form of property, and just like you report transactions related to your property for taxes, you need to do the same thing for the usage of cryptocurrencies as well. This means that you need to keep the details of every transaction using cryptocurrencies ready in your ledger so that you do not have to break your head over finding the exact details when the time to pay your taxes finally arrives. It is essential that you learn more about the various facets of cryptocurrencies and factors associated with it to understand the system of taxes in a holistic manner.

As Capital Assets-

There is not much of a difference between the cryptocurrency and capital assets as far as taxes are concerned. You need to pay capital gain taxes, either short term or long term and these are also calculated the way other capital gains and losses are calculated. Just like the taxes would have been calculated in your other capital assets, if you happen to sell cryptocurrencies, the taxes shall be calculated the same way. This is because the IRS considers the cryptocurrency as a form of a capital asset and therefore, the ways taxes function are also quite the same. However, there is another piece of information that you must understand. If you have plans of selling your virtual currencies for businesses or trade purposes, the taxes that shall be levied on you will be like the ordinary ones. The main criterion for the IRS to charge you taxes of a specified amount is the nature of the trade or the reason why you are selling your capital assets. It looks at the character of whatever it is that you have gained or lost in the process.

Conclusion:

It is a myth that the cryptocurrency helps in tax exemption and also help in making a digital bank balance without having to answer to anyone. There might not be a central figure that mediates the transactions using cryptocurrencies, but these transactions are in no way exempted from being taxed. It is important to understand the rules of taxation in the crypto-sphere and bust any myth that says otherwise. Awareness and the right information is essential in understanding what the reality is so that we are able to make timely decisions and avoid falling into legal and financial jeopardies.