Buying and trading cryptocurrencies have become somewhat of a commonplace in the past year. As trading cryptocurrencies were more of an anomaly before, now there are various simple ways to do this.
An increasing amount of people buy cryptocurrencies as an investment or simply use it as a payment option. However, as the value of, for example, bitcoin has rapidly increased in the past years, questions arise on taxation.
If you own any cryptocurrencies and wonder if you should pay taxes on your gains, the answer is probably yes.
This article provides a brief introduction on taxing cryptocurrency gains and some general guidelines. However, make sure to check out specific legislation in your residing country.
The General Rule
While it is difficult to track cryptocurrencies since they are decentralised and not tied to any bank or country, they could not escape tax liability for very long. As any kind of new technology emerges, countries usually need some years to catch up with their legislation.
This is also true for taxing cryptocurrency gains. As an asset, capital gains on cryptocurrencies are taxable income, although it requires some specifications.
Based on in which country the cryptocurrency owner lives in, the legislation can slightly differ. Depending on how the country’s law defines cryptocurrencies, the taxation changes too. Some countries define cryptocurrencies as an asset and others as a currency.
Depending on the definition the applicable tax law changes too. Gains on assets are treated differently then gain on foreign exchange.
If in the residing country cryptocurrency is treated as an asset, taxation is pretty straightforward. Depending on how much the assets were bought and sold for, the gains can be calculated, and taxes paid on that. In addition, it usually should be determined whether the asset is short-term or long-term since taxation can also differ based on that.
However, if cryptocurrencies are treated as a regular currency, those taxation laws will apply.
Although this seems straight-forward, the volatility of cryptocurrencies might be slightly problematic for tax purposes. As the value can change rapidly, the taxable amount might change accordingly. Make sure to consult a bookkeeper or other authority to determine the applicable value that should be considered for tax purposes.
Although this might seem complicated, gains should be reported however small. Not paying taxes on cryptocurrency gains is as big of a crime as not paying taxes on any other gains.
In conclusion, you will most likely need to look up how your country defines cryptocurrencies, and pay taxes based on that information. However, since cryptocurrencies are still a relatively new type of asset or currency, and we want to categorise it, we can expect more legislation to come.
As governments will realise the potential, they are sure to tighten legislation on gains related to it.
Read more about cryptocurrency taxation in How To Cash Out Your Bitcoins Without Paying Taxes.