Cryptocurrencies are an evolving system and tax is difficult to implement. This is especially true in the United States where the current state of affairs around cryptocurrencies with a federal perspective has left uncertainty for many. In this post, we’ll explore how taxes can be applied to both cryptocurrencies and crypto users when it comes to taxation or lack thereof.
Capital gains tax is a tax that is paid on profits from investments. These profits are calculated based on the underlying value of the investment as well as when and how much was originally paid for the investment. A lot of people make basic mistakes when calculating capital gains taxes.
They assume that gains are only taxed when an asset is sold which means that they pay taxes once they sell it, when in fact if someone holds onto an asset for a long period of time, they will only pay taxes on any gains when they sell it. They also don’t consider that if an investor claims losses, these losses can essentially offset all other capital gains. So just by claiming losses, they can essentially never be subject to capital gains tax at all.
Since cryptocurrency is treated as property for tax purposes, investors have to pay taxes on capital gains, the same way that they would if they were buying and selling shares of stock. This means that an investor who buys one bitcoin worth $600 for $100 has to pay capital gains taxes on $500. This is different from most other assets or investments because they are not considered property and instead are considered goods.
It means that cryptocurrency investors have a higher tax burden than regular stock investors. While a stock investor would pay taxes on 100% of gains, somebody who buys cryptocurrency then sells it would only be paying taxes on the gains between the value at purchase and sale, not the entire value of the currency. This can have a large tax burden on investors.
If you hold onto an asset for two years or longer and then sell it, you won’t have to pay capital gains tax on any of your profits. Under normal circumstances, you would have to pay taxes on all your profits when you sell an asset but if you hold onto it long enough, that will not be a factor in taxation. An investor should definitely consider the tax implications when they invest in cryptocurrencies. If they do not have all of the information about that, they may end up losing money on their investment. This is one reason why they should always seek the advice of a tax advisor before investing in anything.
If you have an inclination to start investing in cryptocurrency, the best place to start is by learning as much as possible. The more you know about the market, the better positioned you will be when it comes to making an efficient investment and receiving a higher return on your investment. The most suggested crypto-currencies to invest in currently are bitcoin and dogecoin.
Overall, taxes on cryptocurrencies are complicated and can be confusing. The IRS has not yet released guidelines for how they will tax cryptocurrencies, so the only way we know at this time is that capital gains taxes apply to cryptocurrency users the same way that it does stocks. The problem with this is that we as investors don’t know where capital gains taxes are going to apply and if their application will be different from stock investments because they aren’t considered property which makes things difficult for investors when it comes to calculating their tax burdens.