A wise man once said, the only inevitable things in life are “death and taxes”, which is a metaphor for the unavoidable nature of death and the taxman. While Bitcoin and other cryptocurrencies have long been favored for the anonymity they offer and the lack of regulation, many governments still require earnings derived from cryptocurrency trading to be declared.
To ensure that the taxman doesn’t come knocking, we have prepared a simple guide to help you make sense of it all. Read on to learn more about the tax implications of cryptocurrency.
How to Make Sense of the Tax Implications in Cryptocurrency
1. Earnings derived from cryptocurrency are taxable
Despite everything that has been said about the anonymous and decentralized nature of crypto trading and cryptocurrency, earnings derived from cryptocurrency; Etherium, Bitcoin, etc, are still subject to tax.
Sorry to be the bearer of bad news but any gains made from Cryptocurrency is subject to taxation.
Crypto activity of any kind, from mining to trading is considered to be a taxable income. Hence, any income derived from such activities must be declared accordingly.
Whether you’re holding down a day job and mining and trading crypto on the side or running a full-time mining pool, you will be required to submit an income tax return on any gains.
Despite its namesake, Cryptocurrency is not recognized as a form of currency by the government. Instead, it was recognized as an asset which will be subject to taxes. Any gains made from the trading and mining of bitcoin will be subject to capital gains tax as usual.
2. Knowing the difference between mining and trading
If you’ve been mining for cryptocurrency of any kind, we have news for you. Besides paying taxes on gains made from cryptocurrency trading, miners will now be required to pay taxes on any cryptocurrency obtained through mining.
For US citizens or residents, the tax amount payable is equivalent to the fair value of the Cryptocurrency on the date of mining. Further adding salt to an already raw wound is the fact that miners are also required to pay a “self-employment tax” on top of their regular income tax rate.
All in all, this could potentially mean that crypto miners could be subject to taxes of up to a whopping 50%.
3. Cryptocurrency exchanges will now be monitored
Ask any fan of cryptocurrency and they’ll tell you that crypto is an anonymous, decentralized currency with no organizational oversight. Hence, this is what has attracted anarchists, tech geeks and hackers to it in the first place.
In the past, the authorities turned a blind eye to crypto trading activities and you could easily exchange Bitcoins or Etherium into cash without anyone blinking an eye. However, in recent years the crypto explosion has turned hundreds of folks in crypto-millionaires overnight.
Consequently, it should come as no surprise that the government has seen fit to begin regulating the cryptocurrency sector. Whatever anonymity that was previously offered by cryptocurrency has since dissolved with government involvement.
However, ever since one of the world’s largest crypto exchanges; Coinbase announced that they would be sending 1099-K forms to users who made trades above valued $20,000, the cryptocurrency industry has been rocked.
With new government regulations requiring cryptocurrency exchanges to report the account details of their users to the IRS, all anonymity that was previously offered is gone. Thus, if you’ve been trading on any of the cryptocurrency exchanges, chances are your transactions are being monitored by the IRS.
4. Know your tax bracket
Just like how individuals earning higher incomes are grouped in a different tax bracket and subject to different rates, chances are cryptocurrency miners and traders will also be treated in the same manner.
Before filing your tax returns you should take the time to contact your local tax office to determine which tax bracket you fall under. After all, you don’t want to end up underpaying or overpaying your taxes.
5. Speak to a professional
The world of cryptocurrency taxation is a murky one with dozens of miners and traders being at a loss as to what needs to be done. Fortunately, a new breed of the accountant has since assumed the burden of helping cryptocurrency traders file their income tax returns.
Instead of filing your returns on your own, chances are you would be better of speaking to a professional. CPAs who specialize in cryptocurrency accounting tend to be fans of cryptocurrency themselves and they would be better suited to advise you on the best course of action.
While some crypto enthusiasts have mentioned that they would not file any returns on their cryptocurrency trades, this is not a recommended course of action. Any conversion of cryptocurrency into real-world currencies would likely attract the action of your country’s tax collection department.
Incorrectly declaring your tax returns can result in your facing stiff penalties or worse. Hence, the best course of action would be to seek the opinion of professionals such as the experts over at https://www.quickrebates.co.uk who are trained to provide you with the best possible professional advice.
The cryptocurrency boom helped dozens of entrepreneurs, traders and mavericks become millionaires in the span of just a few days. However, all of this has incurred the attention of governments all over the world.
To best protect yourself from government consternation, you need to prepare yourself for the new reality of taxation. Afterall, what’s a million dollars in your bank account if you can’t use it?