If you own a certain amount of cryptocurrency, you are bound to pay tax on it. Even if you bought Bitcoins and Ethereum years ago. Because now they are worth thousands of dollars. The price of some cryptocurrencies rose amazingly. So if your coins are equal to the amount of money that you need to pay tax on, you have to pay tax for your coins too.
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However, you have to keep this thing in your mind that your Bitcoins are also liable for taxes. If you are doing successful trading and earning through it, you have to pay tax. Because all these are legal currencies that you can use to get real money. Or you can do shopping with them. Therefore, when you are allowed to enjoy facilities, you are also bound to pay tax.
How does the tax system work for cryptocurrencies?
There is a proper service IRS i.e. the Internal Revenue Service, which deals with the taxation of currencies. And this is the service that will tax your Bitcoins or Ethereum when you trade them and earn profit.
Moreover, if you are not doing trading but the worth of your coins increased, you will have to pay tax. Because they brought profit for you. However, this tax applies only when you exchange Bitcoins for some real-world money or product and services.
For example, you bought Bitcoins in 2018. At that time, they were worth $5000. So you only paid $5000 and got some Bitcoins. However, in 2022, the worth of these coins increased to around $50,000. The government has nothing to do with them till now. Therefore, you do not have to pay a single penny as a tax amount.
However, now you have a plan to buy a Tesla with these coins that you have. So you go and buy yourself a car worth $40,000. So the government will ask you about the source of money. But you earned it through time, as the worth of coins increased. Therefore, you earned a profit of $45,000 by spending only $5000. So now you have to pay tax on the $40,000 that you spent to buy a car.
1. The tax depends upon you
From the previous example, you know that the tax department will only know about you when you buy something. Therefore, the reporting of your net worth depends upon you. You can make small transactions instead of making such a larger ones. In this way, you won’ have to pay tax and can use your coins.
When you do stock trading or bonding, you get a taxation form from the bank or your brokerage firm. But in cryptocurrency, there is no such thing. Because here, trading happens in cross-bounders. No one is following the set rules of any government. Everyone is allowed to buy and sell their coins.
You will only get the tax form when you gain $20,000 and have a history of 200 transactions. So, if you are earning more than $20,000, you can pay a little amount of tax, can’t you?
2. Keep a complete record
You must keep a record of every transaction from the very first time when you start cryptocurrency trading. This is the best way to keep yourself safe and trouble-free. Otherwise, it will become a hassle to find details from the email records. You get plenty of emails in a year. Would you be able to check every single one of them?
That is why it is better to make a record book where you can write down everything. This will help you when you have to pay tax. Although this is not necessary but it will help you a lot while dealing with the taxation department.
3. Keep track of your transactions
Sometimes you use different platforms while trading with cryptocurrencies. And not all platforms keep track of every transaction. Furthermore, it becomes difficult for you to do so because you are using multiple trading ways.
So the best method that you can use is to have software. There is special software that helps you keep a track of your transactions by scrubbing the blockchain. Thus, it will detect any transfer from or to your wallet whether it involves any transaction or not.
4. Hold your coins for a longer time
If you have invested in any cryptocurrency, do not sell it too quickly. Because it will let you gain profit within a year and you will have to pay taxes. This is the best way to minimize the taxation on your earnings.
Therefore, hold your coins for at least a year before selling them. You pay more tax on short-term monetary gains. However, for long-term profits, the tax amount is less. Thus, you will be able to make your statement that you earned this much amount in a year. So the taxation amount can be far less than you imagine.
5. Claim your expenses
Mining requires a lot of effort and a huge sum of money. Because it covers the cost of computers, hardware, software, special servers and also the charges of internet and electricity. So if you are doing mining, you can claim that cost. It will deduct from your total earnings. Therefore, you will only have to pay for the remaining amount. This is also one of the best ways to cut down your total tax amount.