Since the launch of Bitcoin back in 2018, the journey of cryptocurrencies started and is now flourishing day by day. The crypto space is evident of significant growth in the last couple of decades and has changed the perspective of payments and trading at the global level.
Cryptocurrencies are now being used for trading, buying, and purchasing across the world. Therefore, tax implementation on digital assets is becoming crucial. The system of taxation in the crypto industry is a bit complex phenomenon as it varies from country to country according to state laws.
This article aims to give deep insight into crypto taxation and navigate well about the need and implementation of tax in the world of cryptocurrencies.
Understanding the Concept of Crypto Taxation
Back in 2014, the Internal Revenue Service (IRS) of the United States released a crypto guide in which cryptocurrencies were classified as property. Digital assets were categorized as property for tax purposes. As cryptocurrencies gained much momentum in the last decade they attracted the attention of the tax collector agencies.
As digital assets are categorized as property which can be owned by any person, he has to pay tax on digital assets as he pays taxes on the products of the real world. As we pay taxes in our daily life transactions, payments, sales and purchases to the taxation department so is the case with virtual assets. The revenue department of the state collects taxes with respect to the state’s laws.
When to Pay Crypto Taxes?
Each crypto-related transaction is a taxable event and the tax is to be submitted to the authorities. There are types of crypto transactions upon which tax is imposed;
- Crypto-to-Crypto Transactions: If you are trading one crypto asset for another crypto asset, this is a taxable transaction. Such tax is to be paid on the standard set by the market based on the gain and loss formula and the value of the transaction at the time of trading.
- Crypto-to-Fiat Transaction: When you sell or purchase any digital assets in exchange for traditional fiat currency, tax is to be paid to carry out such transactions. EUR or USD are the most common fiat currencies to be used for such transactions.
Apart from purchasing and selling cryptocurrencies, one has to pay taxes on other crypto-related activities. Crypto tax is also imposed on crypto payments, mining, minting, staking and validating. Crypto taxes are also collected in the United Kingdom when you inherit crypto assets.
Why to Pay Tax on Crypto?
Although crypto assets are not considered as currency or money according to our traditional financial system but considered and treated like shares or estate. So, just like we do pay taxes on selling and purchasing a share or estate, we are forced to pay taxes on crypto assets depending on the state’s law.
Crypto trading has a reputation at a global level so the taxation department takes an eye on the crypto trading and collects the tax according to set standards. So, traders have to be well aware of the ongoing transaction and must pay the taxes according to the standard set by the market. They should calculate the tax amount based on the gain and loss formula and the value of the transaction at the time of trading
How to Pay Tax on Crypto?
Individual or institutional crypto users should report the taxes based on their gains on a self-assessment basis. If they are unable to do so, they can look for the HRMC’s guidelines report which gives the complete details about crypto taxation based on the market gains.
Institutional and individual crypto investors are duly advised to maintain a complete record of their crypto transactions. Moreover, HRMC advises the crypto investors to declare the following on a clear basis;
- Number and Types of Tokens
- Date of purchase and sale
- The remaining number of tokes after trading/transactions
- Bank statements
- Wallet Address
- Records of trading, payments, transactions and other crypto-related services
As cryptocurrencies continue to gain worldwide acceptance, governments are paying more attention to their tax implications. Staying informed about cryptocurrency taxation is essential for both individuals and businesses involved in the crypto space. To have the perks of the cryptocurrency ecosystem, you should keep complete records of crypto-related activities and stay updated with the advancement of the cryptoindustry.
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