Crypto can be taxing
One of the early appeals for cryptocurrencies was that they would not be taxed as they are not fiat currencies (yet), in that they are not owned by a country or used for trade inside of geographical tender regulations.
However, as these platforms grow and develop, we are seeing that this is most likely not the case. According to several governments, cryptocurrencies, such as Bitcoin, are classified as “intangible assets” – as opposed to, say, property or currency.
These definitions differ slightly in different regions, but for the most part, gains or losses related to cryptocurrencies can be classified into three categories or scenarios, each of which could result in different tax consequences:
- A cryptocurrency can be acquired through so-called “mining”. Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms. The “miner” is rewarded with ownership of new coins by verifying these transactions, which become part of the networked ledger. This gives rise to an immediate accrual or receipt on successful mining of the cryptocurrency. This means that until the newly acquired cryptocurrency is sold or exchanged for cash, it is held as trading stock, which can be realised through either a normal cash or barter transaction.
- Investors can exchange local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges, which are essentially markets for cryptocurrencies, or through private transactions.
- Goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore the regional barter transaction rules apply.
While the initial receipt of cryptocurrency from mining is classified as income for tax purposes, revenue services may apply a distinct set of tax rules to the cryptocurrency’s subsequent disposition. Short-term trading to generate daily wages is considered income for tax purposes, but long-term investments (usually exceeding three years) are subject to capital gains tax.
We are already reading reports of treasuries extending their cryptocurrency audit and detection services by many global media outlets. In addition, some have publicly listed employment opportunities geared explicitly towards cryptocurrency tracking.
According to recommendations, taxpayers who treat cryptocurrency transactions in a way that is inconsistent with their respective tax laws may face penalties. As a result, you must stay up to date on the newest developments in crypto tax legislation if you own crypto.