Should We Pay Taxes On Crypto Gains ?
How to report them and where. (Most crypto friendly jurisdictions, Switzerland, Singapore, Puerto Rico, Estonia, Georgia…)
The above subject has been a contentious issue in the lips of many cryptocurrency entrepreneurs and like-minds. Cryptocurrency as we all know is a digital currency that is cryptographically secured to make double spending or counterfeiting practically impossible when transacting online.
While this content can’t give tax advice, taxes can be paid on crypto gains. Most countries treat taxes on crypto differently. There’s no uniform policy to taxing cryptocurrency gains. Some nations like Switzerland, Singapore, Puerto Rico, Estonia, Georgia etc. have taken a more liberal approach than others. This liberal approach is aimed to promote better adoption and innovation within the crypto industry. They’ve implemented friendlier legislation that allows investors to buy, sell, or hold cryptocurrency with no tax liability.
In this write-up, we’re examining the United States crypto tax requirements as a case study and how tax on crypto gains are paid.
Making gains on crypto is taxable because the US Internal Revenue Service (IRS) identifies crypto as property, not currency as it’s being classified in most European countries. As a result, tax rules that apply to property transactions, (with the exemption of real estate tax rules) is applicable to cryptocurrency.
The US Internal Revenue Service (IRS) takes crypto taxation seriously and defaulters are severely penalized. The IRS will demand a “yes” or “no” answer from you whether you’ve done any transaction on crypto during the year.
Crypto is on the IRS’s radar
While the number of people who make cryptocurrency gains isn’t certain, however, the IRS has made frantic effort to identify crypto gainers who are profiting, but not reporting.
In 2016, the IRS summoned records from a leading US exchange – Coinbase, after a court of competent jurisdiction ruled the company had to disclose records on about 14,000 users who have “either bought, sold, received or sent at least $20,000 worth of cryptocurrency in a given year.
So if you’ve spent cryptocurrency in any way during these years — by selling it, gifting it to your associates/friends or using it to shop anything online— you have triggered a “taxable event.”
Here are lists of crypto transactions that are taxable:
- Selling cryptocurrency for cash.
- Paying for goods and services using cryptocurrency.
- Buying one crypto with another crypto.
- Receiving mined cryptocurrency.
This transactions must be reported at their fair market value as measured in US dollars.
Transactions that are not taxable:
- Donating cryptocurrency to a Non-profit organization or tax-exempt charity.
- Buying crypto with cash and holding it: in this case, there’s no gain or loss recognized if it’s just being held.
- Transferring cryptocurrency between wallets.
How to determine the amount.
Now, you have known that, tax is paid for cryptocurrency gains, you need to check your activities to figure out your gains or losses. You need to determine the cost basis of each transaction to see whether, it’s at loss or gain.
Prepare your forms
Here are some forms you need to prepare for the payment:
Form 8949: You’re expected to fill out your transaction reports from various exchanges qualified as capital gain or loss.
Form 1040: This form known as Schedule D will capture the summary of your capital gains and losses.
Form 1099-MISC: This form captures all the transactions not captured by Form 8949 & Form 1040. This includes fees income from staking, rewards and earnings from other programs, if it’s $600 or above.
Please, note you’re expected to consult your tax advisor before filling the forms or making any payment.
File your taxes
Having carried out all the above steps by getting your forms ready, the last step is to file your taxes to IRS.
Every nation looks at crypto taxation from a different perspective, ensure you check your home country’s specific regulations—it could keep you on the right side of the law and paying what is appropriate.
This content is not intended to advice anyone on taxation but to keep you well informed. Whatever you do with this informational content is at your discretion and your sole responsibility. Please, seek advice from your tax advisor before making any decision.