After the dramatic lift-off of Bitcoin and other modern cryptocurrencies in recent years, every other stockholder has begun to jump onto this bandwagon to try and reap a profit.
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This enthusiasm, however, is liable to certain tax implications that one must be aware of when investing in any of these modern cryptocurrencies. In this article, we will talk about 6 things that crypto-enthusiasts should be aware of when dealing with taxes.
1. Taxes are based on the Tenure of your Asset
What this essentially means is that your tax payout will vary depending on the duration you’ve held your crypto for, along with, of course, your total annual turnover. The IRS strictly categorizes cryptocurrencies as ‘properties’ and not just ‘securities’ hence these are taxed based on their short-term or long-term gains rate.
Short-term capital gains:
In case you happen to hold your crypto asset such as Bitcoin or Ethereum for a year or less, any dividend would be classified under short-term capital gains and thus taxed akin to your regular income tax rate.
Long term capital gains:
The net surplus that is made on the cryptocurrency that you’ve held for over a year is termed as a long-term capital gain and it is generally taxed at lower rates compared to the regular income tax rate.
Whether you gain cryptocurrency by mining it or simply receive it as the payment or reimbursement for your services/products, it is taxable either way.
If charged on the conventional income tax rate, the tax would have to be charged on the entirety of cryptocurrency the day it was received.
In the event that the value of these assets rises after you mine/receive them through these operations following which you choose to sell or spend them at a profit, you would be under obligation to pay capital gains taxes on the dividend, depending on the tenure of your crypto asset.
2. Swapping Crypto assets is Taxable
A proceeding is classified as taxable if a particular crypto asset is swapped for another token such as USDC or DAI. A crypto swap is said to consummate when a particular cryptocurrency is slagged off in exchange for a replacement. Swapping differs from the conventional crypto-to-crypto trade as older coins or tokens are discarded for fresh new ones.
The amount that is taxable for each transaction is determined based on the initial price paid for each respective token compared to its cost on the layout. Hence taxes aren’t just limited to being applicable only when you convert cryptocurrencies to traditional currencies but also when they are exchanged with one another.
Another aspect to keep in mind is that if you were to receive interest on a digital asset in exchange for certain products or services that you offer, this would be taxed just as how traditional dealings would normally be taxed.
3. Tax is to be paid on Devolution of a Token
The act of initially receiving a token is not generally considered as a taxable occurrence, neither is transferring tokens to another crypto exchange such as Coinbase or Digital wallet. However, it is important to note that the devolution of a token at a profit or pertinent loss is liable for tax payment. It is understood that if one lends their crypto or contributes to a portal that grants crypto loans, they would be liable to pay tax on whatever they were to earn upon lending their crypto.
4. Minimize Taxes and Equilibrise Gains with Losses
As is the case with any other investment, an advantage can be taken of crypto gains by harvesting losses on other supplementary investments the year you retrieve your profit. This translates to the simple fact that if you made a certain amount of money selling Bitcoin and were to lose the same amount of money for selling Ethereum, you wouldn’t really owe any tax as you technically hit break-point.
As cryptocurrencies are fundamentally very volatile, it is considered wise to take a loss when expansive swings happen. A shrewd investor can easily gauge the advantage of this manoeuvre as there is zero repurchase lag time as compared to other traditional securities.
5. Incentive Token Taxes in Cryptocurrency
Incentive tokens are now being distributed by DeFi (Decentralized Finance) platforms in exchange for activity on their platform. When such tokens are distributed they are taxed as income based on present market value. When these are sold, capital losses and gains linked with your crypto are reinstated.
To state in simple terms, if you were to earn 1COMP when COMP is 150$, income tax will be owed by you on that 150$ of the income based on your income tax rates. Now, if you were to sell that particular COMP as soon as it reached 180$ you would now owe taxes on the profit of 30$ in the form of capital gains.
6. Do Not Hesitate To Get Professional help
As the whole taxing realm in dealing with cryptocurrency can be a little complicated to get around, It would be wise to seek professional help from an accountant that specializes in this field if you’re already reaping a substantial amount of profit after investing in this niche.
Ever-changing and heavily convoluted laws pose an intimidating challenge for those that lack the appropriate experience and financial dexterity to deal with the same. Many plutocrats are hence seen engaging in hiring technical assistance from crypto experts to handle their cryptocurrency transactions.
As the world slowly progresses towards decentralization of currency by gradually replacing traditional currency with the digital alternative, now is the time to play smart and invest for a more secure future, however, in doing so, one must keep in mind certain tax implications and official proceedings to avoid getting chased down by the IRS when things start to get going in the digital globe of the future.
Linking these exchanges to crypto wallets and newer crypto-centric tax recording software would save you from tumbling down the cybernated rat race in the long run.