Are cryptocurrencies taxed? How do people pay their taxes when the government is not involved?
As you get more involved in the crypto space, these might be some questions you have. While the system used on the blockchain is decentralized, it leaves many people to wonder how these digital assets are regulated and taxed, considering that there are lots of investors who are taking home massive profits.
Well, the short answer to your question is–yes, cryptocurrencies are taxed. But how so?
All about crypto taxation
Each country has its own rules in terms of taxation. This is not different when it comes to cryptocurrencies. Each state views cryptocurrencies differently. But one thing is for sure; there is not yet a precise classification of where cryptocurrencies belong in the list of assets recognized by governments.
Some experts believe that cryptocurrencies should be considered as securities like stocks. So, when they are taxed, capital gains are recognized. Some places tax cryptocurrencies based on capital gains, and the tax percentage rate is usually equal to the “capital gains tax” of the country.
The income you get from cryptocurrencies is considered part of your income in the US. If you’re a retail investor and make money from trading crypto, your profit should be declared in your tax return and part of your taxable income. The tax rate would depend on how much your total income is. The tax rate could be as low as 10% or as high as 37%.
Meanwhile, some countries have already defined how they will tax cryptocurrencies. India, for example, has just recently accepted a proposal describing the crypto tax rate at 30%. This is regardless of how much personal income an investor gains. This 30% tax rate is considered capital gains tax. There are discussions that it will soon turn into a law.
In other countries, there are no crypto tax rules to follow yet. This is one reason why some governments, including banks, are so strict in tracking or monitoring transactions that are allegedly from trading cryptocurrencies. We all know that the crypto market is so rewarding that a person can buy his house and lot with his crypto earnings. So, some countries assign a team to monitor crypto transactions and track those who are not paying their taxes correctly. South Korea, for example, is limiting crypto transactions to investors who use their real names in their trading and bank accounts.
What about other digital assets?
Besides cryptocurrencies, you might also get curious about how other digital assets like NFTs are taxed. The truth is, there is no regulation yet defining how they should be recognized. Pure digital assets? Securities? Collectibles? Financial instruments? There are still debates on how NFTs should be recognized, regulated, and taxed. Some experts say that they should be classified as collectibles, similar to gems and art in the real world. Others concur that NFTs should be taxed like cryptocurrencies since they are powered by blockchain.
While there is no rule or law defining how NFTs and other digital assets should be classified, especially in taxation, all profits an investor makes from them should be taxed as a personal income or capital gains.
Why are there no specific tax rules for crypto?
The whole blockchain ecosystem is decentralized, which means that no one controls everything. No person, government, or institution can control how investors move within the market. So, if you’re a crypto holder, you have complete control over your digital assets.
Decentralization is a bar for the government to take complete control of the traded assets. After all, that’s what decentralization is all about–to eliminate intermediaries. It goes to say that there are no tax rules for crypto yet because of decentralization. Adding to that is the spread out of information across different computer networks worldwide. So, there are multiple storages of data instead of one. So, it would be challenging for the government to gather all the needed information from the scattered storage.
What about your winnings from crypto casinos?
Outside blockchain, gambling winnings are usually taxable. You’ll consider them as taxable income. If you file your taxes individually, your winnings from crypto casinos like BC Game are not different. You can still view them as personal income subject to personal taxation. There’s no specific law yet covering crypto earnings from crypto casinos. Your earnings from crypto casinos are treated the same way as cryptocurrencies from exchanges.
Do you have to pay your crypto taxes?
Although there are no tax regulations specific to crypto yet, you have to pay your taxes accordingly. This doesn’t just apply to crypto earnings. You also have to see your overall taxable income so you can file your tax returns and be able to pay your obligation. Remember that both decentralization and centralization exist. If you have transactions on the blockchain, it doesn’t mean that you will not comply with the commitments you have in your country. After all, what makes traditional finance good is the organization through all the rules and regulations.
How can you pay your crypto taxes?
The first thing you have to do is to know the tax laws used in your country. If your place has been active in crypto trading for the past years, there should be a discussion of how your country is taxing digital assets like Bitcoin. If none, you can always ask the right people from your government to help you determine the appropriate tax laws to use.
Once you know what to do with your crypto earnings, the next step is to file your tax return. Depending on the total income you have, you might need to add all your earning sources to determine the tax rate you need to use. Again, it’s better to seek help from tax professionals regarding this matter.
In summary, cryptocurrencies are taxed. But taxation rules differ per country.