Using crypto: Taxes

Taxes

IS CRYPTOCURRENCY TAXED?

While cryptocurrency remains in relative infancy as a usable and functioning form of digital currency, governments continue to scramble to understand not only how they work but how they can profit from them.

While part of users’ greatest attraction to cryptocurrency are its decentralisation qualities and resistance to third-party fees and manipulation, governments are becoming more and more aware of its growing popularity and attached profit potential.
However, despite the intentions of many countries, taxing profits made from cryptocurrency remains a grey area for governments, with no consensus on how to achieve a fair, equitable and effective system.
As much as cryptocurrency owners detest the idea of government involvement, but those accepting there is no way of avoiding taxes at least have the benefit of options.
This is because unlike fiat currency, governments all over the world have a wide range of drastically different cryptocurrency tax systems meaning users can potentially pick and choose which systems work best for them.

Most countries fall into a set of four simplified tax categories - property, currency, hybrid or negligible.

Most countries taxing cryptocurrency will either treat it like property or currency, while others will adopt specially designed systems for cryptocurrency incorporating elements of property and currency policies.
Other governments are yet to introduce or even draw up cryptocurrency policy and remain uncommitted to a formalised nation-wide cryptocurrency tax system, while a few have simply outlawed cryptocurrency ownership.

HOW IS INCOME AND CAPITAL TAX DIFFERENT?

A large percentage of countries taxing cryptocurrency do not regard it as currency, rather they treat any coins owned as property.
This means anyone owning cryptocurrency in these countries falls into a similar category as those trading in stocks.
This means that just like stocks and other forms of taxable property taxes are only incurred when cryptocurrency is sold.
When cryptocurrency is sold, the seller makes either capital gains or capital losses, which is simply money made or lost on the original purchase.
Much of how each country taxes capital gains depends on their own tax codes, but most operate based on the time span over which the gains are appreciated in value.

If cryptocurrency is bought and sold at a profit within the course of 12 months of purchasing, then it may be taxed the same as currency, rather than property.
This means taxing cryptocurrency the same as personal income, or income made from a business.
While it varies from country to country, taxing cryptocurrency as income usually means only profits made and converted to fiat currency need to be declared for tax purposes.
Cryptocurrency generated from activities such as mining or gambling, or trading for cryptocurrency profits are usually exempt.

While some countries fall into this method of cryptocurrency tax coding for convenience, other countries have adapted and evolved their tax-by-currency systems to cater for cryptocurrency’s rapid growth.
There are countries where cryptocurrency is being legalised and actively promoted to be used as everyday currency.
While this means citizens have better access to cryptocurrency and a fast-growing ability to use it for regular purchases, the countries implementing these changes are generating larger amounts of cryptocurrency tax revenue.

DO ALL COUNTRIES TAX CRYPTOCURRENCY?

Using crypto: Taxes

There are also governments taking the opposite action on cryptocurrency, either choosing or neglecting to tax cryptocurrency at all.
Governments have passed laws legalising cryptocurrency, while also making them exempt from tax, including any profit schemes such as trading or mining.
This tax method, or lack thereof, is usually applied in an effort to bolster a country’s status as a tech haven making it an attractive location for cryptocurrency to be bought and invested.
Many other governments are either yet to cater for the fast growth of cryptocurrency and have no tax policy or have outright banned the ownership and trading of cryptocurrency.

While there are several different models being adopted, governments have generally implemented hybrid plans incorporating a combination of property, income and exemption tax methods.
These methods usually involve a deeper and much more complicated definition of what cryptocurrency is, making for a more complex approach and a tougher task for users required to know what they need to declare.
However, the time, effort and financial investment in forming combinations of cryptocurrency tax systems to form hybrid versions is often breeding much-needed innovation.
Taxing cryptocurrency, like using cryptocurrency and producing cryptocurrency, is still in its infancy.
While a consensus may never be reached on what form a balanced tax system satisfying both governments and user should take, governments experimenting and innovating are more likely to offer clues to what might work best.

FAQ

Is cryptocurrency taxed?
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Unlike fiat currency, governments all over the world have a wide range of drastically different cryptocurrency tax systems meaning users can potentially pick and choose which systems work best for them.

How is cryptocurrency defined for tax purposes?
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Most countries fall into a set of four simplified tax categories - property, currency, hybrid or negligible. Most either treat cryptocurrency like property or currency, while others will adopt specially-designed systems for specific cryptocurrency incorporating elements of property and currency policies.Other governments are yet to introduce or even draw up cryptocurrency policy and remain uncommitted to a formalised national cryptocurrency tax system, while a few have simply outlawed cryptocurrency ownership.

Are cryptocurrency transfers taxed?
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While it varies from country to country, taxing cryptocurrency as income usually means only profits made and converted to fiat currency need to be declared for tax purposes. Cryptocurrency generated from activities such as mining or gambling, or trading for cryptocurrency profits are usually exempt.

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