The blockchain industry, trading as well as cryptocurrency investments are becoming increasingly more regulated. But along with state regulation, there is its constant companion — taxes. How to calculate cryptocurrency taxes?
Since cryptocurrencies are part of a new industry, the practice of tax collection on their turnover is at the initial stage. Where and how taxes are collected from crypto-investors and companies, and what part of a profit from investments in crypto assets has to be given to the state in 2020 — today, we’re about to find out!
Guide to Cryptocurrency Taxes: How to Calculate Taxes on Crypto in the USA
The USA is the major market for cryptocurrencies, but it’s also a country with a complex tax system. The state actively regulates cryptocurrencies, while a crypto community is trying to deal with a new tax system. How to calculate taxes on cryptocurrency in the USA?
The tax administration in this country is entrusted to the tax service, or the Internal Revenue Service (IRS). The IRS defines cryptocurrency as property, not currency, and applies appropriate taxation to transactions with it.
Investors and traders are required to report on many (but not all) transactions with cryptocurrencies, regardless of whether they were profitable or unprofitable. In the USA, regulated platforms collaborate with a tax office and transmit information about their customers to it.
In a declaration, it’s necessary to specify the dollar equivalent of each transaction. The list of cases to be reported is extensive, and different taxes may be levied depending on the situation.
For example, if a user makes a profit from mining, receives a reward for services rendered or goods sold, or even participates in an airdrop, then such cases are considered as income generation. Respectively, income tax is applied to them (10-37% depending on the level of earnings).
If an investor sells coins for fiat money, converts them to another cryptocurrency, or spends them on goods and services, then in such cases, capital income tax is applied. How to calculate taxes for cryptocurrency in this case? Well, up to 20% for investments with a term of more than 1 year are levied. For large incomes, a tax on net investment income (about 4%) may also be levied.
But there are also operations for which no taxes are required. For example, buying cryptocurrency for fiat money and then storing it in a wallet without movement (in other words, HODL); donations; transfers of coins between your wallets.
Calculate Crypto Taxes: Everything You Should Know
Let’s learn how to calculate crypto taxes! After a crypto-investor has collected information about all transactions, he must calculate the total profit or loss for a year. It isn’t difficult if transactions can be counted on one hand, but what if there are hundreds of them?
Firstly, American crypto exchanges provide a service for the preparation of such reports (for example, Coinbase). Secondly, in the USA there are a large number of tax consultancy firms, including automated ones. That is, many of them help to deal with taxation on cryptocurrency transactions.
If an American crypto investor decides not to declare any operations, there is a chance that a tax office will know about it and apply sanctions to him. This is due to the fact that the IRS can know the data on the taxable actions of a citizen. So, how to calculate crypto taxes? What is the main principle?
As Forbes explains, the IRS uses a special system. It works quite simply — Coinbase, Kraken, and other US regulated crypto exchanges are required to send tax return forms to all users with more than 200 transactions and $20,000 turnover per year.
Copies of the same declarations are sent to the tax office. If a citizen doesn’t provide a completed declaration, then a program notes him. That is, he started to get notifications. In addition, the tax office may request information from an exchange about any investors. So, in the summer of 2019, according to the results of a special investigation, the IRS sent warnings about the need to declare transactions to 10,000 crypto traders.
What kind of organizations need to calculate cryptocurrency taxes? Well, organizations, as well as individuals, pay income tax and capital gains tax, and the share of taxes on average approaches 50% of total income. In addition, in some states, companies with a cryptocurrency profile must obtain a work license from local authorities. To get it, a company must meet a wide range of requirements. It’s necessary to pay for possession of the document as well. The most famous example is BitLicense in New York State. However, the business is dissatisfied with really high standards and the cost of obtaining a license (from $50,000 to $100,000). As a result, some crypto entrepreneurs are even trying to rescind the license through the courts.
Calculate Taxes on Cryptocurrency: Interesting Facts
In many developed countries, public authorities have actively taken up the collection of taxes from players in the crypto industry. In less frequent cases, authorities, on the contrary, try to mitigate the tax burden. There are two main reasons for this — support for the crypto industry, or simply the lack of deep blockchain monitoring tools.
While the analysis of blockchain transactions is limited to an introduction of duty for users and companies to report on their finances. By the way, the UK Office of Taxes and Customs Duties recognizes this and has already begun work on creating the necessary tools.
It’s difficult to control the use of cryptocurrencies in commerce, so many countries simply refused to collect taxes (at least for now). Officials focused on collecting income taxes. Given the fact that lawmakers force trading exchanges to disclose all data about their customers and their operations, this is becoming much easier.
What other interesting information on how to calculate taxes on cryptocurrency do you know? What about taxation on crypto in your country? Just share your thoughts in the comments!
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