Understanding Crypto Taxes

Taxes in cryptocurrency are not different from taxes in other sectors.

The way taxes are deducted from your income is how taxes are deducted from your crypto transactions.

Although, not all crypto transactions attract taxes.

The crypto transactions that the government tax are called taxable events

Non-taxable events are the kind of crypto transactions exempted from being taxed.

Taxable events include the sale of digital assets, crypto mining, and crypto exchange.

Non-taxable events include crypto donation, receiving crypto as a gift, holding your digital asset in your wallet after purchase, etc.

Coming across crypto taxes, one might wonder how a digital market under no regulation or regulatory body will be taxed.

Not to worry, this article will explain in detail how cryptocurrencies are being taxed.

Introduction to Crypto Taxes

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Since 2014, the cryptocurrency laws have continued to remain the same; all profits made from crypto are taxable.

The Internal revenue service (IRS) notice of 2014-2021 outlines all the basics of cryptocurrency taxation and the procedures in which your transactions will be taxed. However, not all transactions attract the same tax amount.

For instance, The United States Internal Revenue Service made it clear that they will treat all digital currencies as investable assets for tax filing purposes.

The government expects you to report your crypto sales, transactions, payments, conversions, and transfers to the Internal Revenue Service in the US. In some regions, you report the transactions to State authorities.

Furthermore, not all crypto transactions and dealings attract tax.

Those crypto transactions that do not attract tax are called Non-Taxable events, while those crypto dealings that attract tax are called Taxable events.

At this point, it is necessary to look at what taxable and non-taxable events are in detail. We will also identify the transactions that fall under both categories.

What Are Non-taxable Events?

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The following crypto transactions do not attract taxes. They include;

Buying Crypto Using Cash And Holding It
If you buy a digital asset with cash and hold it in your blockchain wallet, you will not be taxed no matter how long you hold the token in your wallet.

Most investors buy crypto assets with cash and hold them in their wallet till it eventually appreciates, and they will sell them afterward. During the period of HODL, you will not be taxed.

Crypto Donation
You will not be taxed if you donate to a recognized charity and non-profit organization using cryptocurrency.

Some charity organizations fall under 501(c)(3) charitable organizations, like GiveCrypto.org. If you donate a token from your blockchain wallet to them, you can claim a charitable deduction.

Receiving And Giving A Gift
If you get gifted a cryptocurrency in the crypto market, no matter the worth, it will not attract tax. However, if you sell such a gift or stake it on the blockchain network, it will incur taxes.

In addition, if you are gifting out a digital asset worth below $15,000 in a single calendar year, you will not be taxed. However, if the gift worth exceeds $15,000, you will be required to file a gift tax return, and the appropriate tax will be deducted.

Transferring Crypto Across Your Wallets
If you own multiple blockchain wallets and they all carry your personal information, you can transfer and exchange digital assets without incurring taxes.

In this case, you can transfer over your original cost basis and the date you acquire the cryptocurrency.

What Are Taxable Events?

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If your earnings and transactions fall under this category, you will be taxed accordingly. Those transactions include;

Selling Your Digital Asset In Return For Cash
If you buy a digital asset and keep it on your blockchain wallet, it will not incur taxes. The moment you decide to sell it, in exchange for cash, you will be taxed.

Most especially when you gain while holding such a digital asset in your wallet, you are liable to pay tax. Sometimes, you can deduct your loss from the tax you're expected to pay when you sell at a loss.

Converting And Exchanging Crypto
If you own a cryptocurrency and decide to convert it to another token, you incur taxes. Also, if you exchange a digital asset for another blockchain asset, you will be taxed.

For instance, if you have 1BTC (bitcoin) in your blockchain wallet and want to convert it to ETH (ethereum), you will have to pay tax.

Mining Crypto
When you mine cryptocurrencies, it will be considered “taxable as income,” and you will have to pay.

The reason mining attracts tax is that there is a high probability that the token's market value will have increased by the time the receiver gets them.

If you take mining as a business, this is a different tax, and Crypto mining as a business venture is taxed as self-employment income.

Receiving An Airdrop
Airdrops are always in the form of giveaways or rewards from cryptocurrency developers. Airdrops are marketing campaign tactics to get more people to invest and push the value of a digital asset.

If you receive airdrops, you should report it in your income as it is taxable. Airdrops are taxed based on the amount you receive.

Moving forward, it is essential to explain how the crypto taxes are calculated briefly. Even though it is not advisable to calculate your taxes yourself, you should only file for tax on taxable events.

How To Calculate Your Crypto Taxes

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Most households in America do not bother to calculate their federal and state income tax, and the government takes the deduction from the source.

The same applies to crypto taxes. When you report your earnings or your transaction details, you should specify that the earnings are crypto-based, and your tax will be calculated based on your tax bracket.

The higher your crypto earnings and transaction, the higher tax you will incur. You move to a higher tax bracket when you exceed a specific limit.

Conclusion

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We used the American Internal Revenue Service as a case study in this article. Although the crypto market is not under any regulation in America, the government has mandated every investor and holder to report their transactions for tax filing.

Some crypto transactions do not attract taxes, while some attract taxes. All transactions attract different taxes once they fall under taxable events.

Calculating your crypto tax might be pretty tedious; you should allow the regulators or agencies in charge to do the calculation. You can cross-check when you get the final tax files.



Author: Valentine A., Gate.io Researcher
This article represents only the researcher's views and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.