Digital currencies have grown in popularity in the past five years, leading to increased attention from regulatory authorities worldwide. Many of these regulatory bodies are currently working to control the use of digital currencies within their territories. However, a few are proposing laws aimed at taxing the crypto earnings of their citizens.
Such proposals raise many questions for crypto traders worldwide. For example, many people wonder, will my crypto earnings be taxed? How much taxes am I required to pay on my digital assets? This article will take a closer look at the new crypto taxation laws in the United States and how they apply to digital currencies in that country.
Taxation Of Cryptocurrencies
There are so many complexities associated with the taxation of crypto assets. Many of these difficulties arise because digital assets are not regulated. As a result, there are no uniform taxation laws that apply to digital currencies.
Moreover, many top countries in the world refuse to classify cryptocurrencies as financial assets. Consequently, such countries refrain from taxing digital assets. Some of these countries include Germany, Singapore, Portugal, Malta, Switzerland, and Belarus.
When it comes to new taxation laws for crypto assets, the Internal Revenue Service in the USA is currently the main regulatory body pushing for the taxation of top digital asset Bitcoin. This regulatory body has proposed several laws on taxing Bitcoin and other digital assets for crypto traders living within the USA. Let us consider an essential part of the crypto tax law.
Classification Of Digital Currencies As Financial Assets
The new US tax law has classified all digital currencies as properties as a first step to effectively taxing digital assets. As a result, these digital assets are subject to capital gains taxes. However, the law stipulates that users can only pay taxes on profits made from their digital assets.
The IRS will apply the new tax law the way it is applied to trading stocks. Thus, crypto traders will only be required to report gains they make on their crypto assets as income when they decide to sell them. This also means that crypto traders who do not sell their crypto assets are free from any taxes. However, this system of taxation raises numerous questions for crypto traders living in the United States. Let us consider a few of these questions.
Which Bitcoin Transactions Are Taxed?
Under the newly enacted crypto law, the IRS requires reporting of the following transactions involving bitcoin:
- Mined Bitcoin Sale: Crypto traders must report any transactions involving the sale of Bitcoin or personally mined Bitcoin to a third party.
- Resale of Bitcoin: Crypto traders must report any resale of previously bought Bitcoin to third parties.
- Mined Bitcoin for Purchases: Crypto traders must report any purchases made with personally mined Bitcoin.
- Owned Bitcoin for Purchases: traders must report any previously owned Bitcoin used for purchases.
If any Bitcoin transaction falls under the scenarios stated above, traders should report such transactions because they are taxable under the capital gains tax.
Will Time Factor Into The Amount Of Taxes I Am Required To Pay On My Bitcoin Holdings?
The short answer is yes. Crypto traders resident in the United States will be required to pay taxes on their gains from a sale of Bitcoin. However, the amount of taxes they are required to pay is dependent on the length of time they have held their digital assets.
Crypto traders who have held Bitcoin for more than a year will be required to pay long-term capital gains tax on their holdings. A 0% tax will be applied to any Bitcoin earnings of around $40,000 per year based on that taxation system. Similarly, a 15% tax is applied to Bitcoin earnings worth up to $441,450, while a 20% tax will be applied to Bitcoin earnings that are worth $441,450.
Long-term capital gains tax will not apply to crypto traders who have held Bitcoin for less than a year. Instead, an income tax rate will be applied to earnings from such assets. The above-stated tax measures only apply to crypto traders that have made profits from their crypto holdings at the point of sale.
However, in cases of loss, the crypto tax law provides an opportunity to write off the amount lost. As a result, losses from crypto investments are not taxed by the IRS. In addition, crypto holders can use their losses from crypto investments to reduce their taxable income. When applied, traders can reduce their taxable income by a maximum of $30 and can extend any further losses to a future date.
When I receive and I hold cryptocurrencies in my wallet, do I need to pay taxes?
A cryptocurrency salary or payment is categorized as ordinary income for tax purposes. Furthermore, cryptocurrencies are valued for tax purposes based on their price on the day they were used to pay salaries.
As previously stated, there are no uniform tax laws applicable to digital assets today. Many countries currently refuse to recognize digital currencies. Therefore, most crypto traders are left untaxed. However, with the move by the IRS in the United States, we expect to see a more general adoption of tax laws for cryptocurrencies soon. When that occurs, crypto traders will have to pay taxes on their crypto transactions.