How Is Cryptocurrency Taxed?

Cryptocurrency

Taxation is an integral part of every economy. Whether the nation is developing, developed, or under-developed, every economy depends on taxes for better revenue. Generally, taxes are levied on several monetary transactions; however, nowadays, cryptocurrency is also becoming a part of taxation.

Cryptocurrency

The entire world is witnessing the tremendous growth and popularity of cryptocurrency, and thus; as a result, the crypto market is setting new records. Other than the whole nation, the IRS, i.e. Internal Revenue Service is also watching cryptocurrency. Hence, if an individual transacts crypto, and ecn trading they probably fall under the taxation category.

Understanding Cryptocurrency

Before taxation, it is essential to understand the concept of cryptocurrency entirely. In layman’s terms, cryptocurrency is a digital currency used as a medium of exchange. Furthermore, the exciting feature is this currency is primarily decentralized and is not controlled by any regulatory authority. Cryptocurrency significantly depends on blockchain technology for optimum and smooth functioning.

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Cryptocurrency And Taxation

In many nations, cryptocurrency is considered a digital asset. Thus, the IRS treats crypto like bonds, stocks, and different capital assets. The Internal Revenue Service taxes the cryptocurrency like these financial components are taxed. However, the only condition is getting details like where an individual got cryptocurrency and how long they will keep it. The transactions are also categorized into two parts: taxable and non-taxable transactions. Following is a complete detail:

Taxable Transactions: The transactions that lead to tax generation are taxable transactions. Following are the examples of some of the transactions:

1. Trading Crypto For Cash: When individuals sell crypto for cash or any currency, they owe tax to the government. If individuals sell crypto and forex trading for more than the cost price, they are more likely to invite taxes.

2. Conversion: If an individual uses bitcoin to buy ether or any other cryptic digital currency, technically, the bitcoin is sold. Hence, when a selling transaction is carried out, the individuals are required to pay taxes.

3. Using Cryptocurrency For Commodities And Services: When individuals use bitcoin to buy any commodity, say pizza or any toy, they are most likely to invite taxation liability. From the IRS standpoint, crypto spending is not much different from selling crypto. Furthermore, as per the rules and regulations, an individual is required to sell crypto first to use it as a medium of exchange for buying goods and services.

Whenever the price of cryptocurrency is rallying, people start spending a lot more.

– Erik Voorhees

Non-Taxable Transactions: The transactions that don’t cause any taxation liability upon crypto holders are called non-taxable transactions. Following are some the examples of non-taxable transactions:

1. Cash Purchase Of Crypto: When an individual buys crypto and holds it for a long time, such a transaction is not taxable. Taxation occurs when an individual uses it for selling or spending on commodities.

2. Gifts: Receiving cryptocurrency as a gift is not a taxable transaction. For transactions to be taxable, individuals need to incur taxable transactions.

3. Giving Gift: Apart from receiving cryptocurrency, individuals who offer other people crypto as a gift are also exempted from taxes. $15000 is an exempted limit via which individuals can send crypto as a gift to other people.

4. Transfer: When the cryptocurrency is transferred to the self, the particular transaction is not regarded as a taxable transaction.

Conclusion

Therefore, in a nutshell, it is fitting to mention that individuals must have complete knowledge while transacting cryptocurrency. Other than this, it is also essential that individuals must know the difference between taxable and non-taxable transactions while dealing in cryptocurrency. Furthermore, crypto is treated as a taxable commodity because many people consider it a profitable investment and decide to keep it with themselves. Additionally, the IRS was also unable to get more revenue from individuals that used to deal in cryptocurrency.