Like other assets, cryptocurrency such as Bitcoins is also subjected to tax. However, the process becomes so complex that only a few pay the tax. The non-filers consider cryptocurrency as a gateway that can be utilized to generate multiple income streams and transform their black money into moveable cash. Therefore, due to this misconception, they (the non-filers) keenly avoid paying the taxable income because if they do, they will come under legal jurisdiction.
Consistent improvements and worldwide acceptance of cryptocurrency (as a mainstream currency) gained a lot of IRS's attention (Internal Revenue Service). In the past, the federal legal services were not paying any attention to this digital currency, however, when the cryptocurrency gained a lot of user's attention across the globe, it came under the radar of several treasury services.
Therefore, people dealing and trading in cryptocurrency became more concerned than ever to pay the subjectable tax amount. The article elaborates on cryptocurrency taxes. You can find out more about the types that are subjectable to tax.
Understanding the main types
From the beginning, people across the world considered cryptocurrency as a form or alternate of fiat (paper) currency. However, the guidelines on virtual currencies consider cryptocurrency as property. This consideration calls for a capital gains tax as paid on different property assets. Therefore, for paying the tax, it is better to understand what are the types of different capital gains tax.
In general, capital gains taxes are divided into short-term and long-term. As the name suggests, short-term taxes are payable when you have had cryptocurrencies for less than a year. On the contrary, long term taxes are subjectable if you had owned a cryptocurrency for over a year. And in the year, you have not traded or sold that cryptocurrency. As far as the tax rate is concerned, it can be affected by several factors including the state you are living in. Long-term taxes are not that high.
In some cases, cryptocurrencies are also subjectable to income tax. Like when you are working for some company and are paid in cryptocurrency. Here, cryptocurrency will be declared as your official earning and you will pay a certain amount against it in the form of income tax. Furthermore, both the employees and end the employers will have to present their crypto withholding and earning as they previously reported fiat currency.
Realizing the taxable types
Before jumping to any conclusions, it is better to realize and undermine that which types of cryptocurrencies are taxable and which can be exempted.
You have to pay for the tradings.
It is compulsory from the IRS department that the ones who are trading in cryptocurrency must report their earnings and losses. Like in some cases, a merchant accepts the payments in cryptocurrency and then converts them into dollars. In such a scenario, he will be subjected to a one-time tax before spending that income.
Not everything crypto-related is taxed.
Based on the previously stated statement, you are not subjected to pay taxes in case of withholding or buying the cryptocurrency. For a cryptocurrency to become taxable, it must be traded or converted into the standard fiat currency. And similar to fiat, if you lose some crypto money during the trade, you hold complete rights to claim a loss.
Crypto-miners must pay their taxes.
The miners creating their cryptocurrency by solving various algorithms are subjected to tax. It is because they will come under the category of self-employment which calls for a self-employment tax. In such cases, they (miners) will have to pay around 15% of their mined crypto-income.
The bottom line:
It is better to pay your crypto taxes on time otherwise you will be committing tax fraud. And in case of avoiding cryptocurrency, the government can impose a heavy fine of $250,000 or you could end up in jail for five years.