- The Ministry of Corporate Affairs (MCA) has imposed the compulsion to disclose the profit and loss of digital currencies.
- This shows a major interest of the government in the regulation of virtual currencies.
Crypto Taxation works in the following way, defining which crypto-based event is taxable:
- Crypto to Crypto conversion (Swapping)
- Crypto to Fiat Conversion
- Transactions made on Crypto (Stablecoin)
Trading in cryptocurrency makes an individual taxable on their trades. As the world gets digitized and more active, in the case of Virtual currencies, it introduces a large number of opportunities. Meanwhile, it’s important to be aware of your tax obligations as well.
How does Taxation on Crypto work?
Tax in Crypto works in various ways. The main tax is imposed on Transactions and the mining of crypto.
Mining can be defined as the process of recording and verifying transactions across the blockchain of a network. Transactions are verified by a group of node peers, or computers known as miners, with the help of power systems and hardware mining devices.
The amount received after mining will be taxed at a flat 30% rate, excluding electricity and infrastructure costs. It can vary as per different countries’ guidelines.
Tax on Ownership
At the time of taxation, tax-filing individuals are asked whether they use any cryptocurrency or not. This question is asked mainly to determine if you have been a part of any crypto transactions in that particular year. Whether you Buy, Sell, Hold, or Exchange any type of Cryptocurrency defines your involvement with virtual currency. This helps the government impose taxation on it according to your potential transactions.
What is Form 1099?
Form 1099 is sent to you by the entities that have paid you throughout that particular tax year. Each payer has to complete Form 1099 for each covered transaction. This form is issued to a taxpayer so that they can provide information about any type of non-employment income to the IRS (Internal Revenue Service).
Taxpayers are responsible for all types of income, whether it’s employment or non-employment. And crypto-traded profit comes under the non-employment type. So having a Form 1099 doesn’t exclude you from paying taxes regarding crypto transactions.
Depending solely on Form 1099 may result in an incomplete transaction history, and you will lack a record of your Cryptocurrency transactions, which may lead to problems. Keep an accurate report of your crypto trades to fulfil your tax liabilities.
Any transaction made by you, whether you buy, sell, or exchange any cryptocurrency, is considered a Capital Gain. The Tax imposed on Capital gains will depend on whether it’s long-term or short-term.
- Short-Term Capital Gains: When a taxpayer holds any particular cryptocurrency for a certain period of time, the profit made by holding it will be considered a short-term gain. This type of gain’s income tax rate is usually higher compared to long-term capital gains.
- Long-Term Capital Gains: Long-term capital gains are taxed at preferred tax rates, which are lower than usual income tax rates. It implies that when a taxpayer holds a cryptocurrency for over one year before selling or exchanging it, the capital gained is considered to be Long-term capital gains.
The tax implementation on cryptocurrency is variable, as different countries have their own laws and act accordingly. But in most countries, crypto exchange is taxable and imposed on holders who have any type of involvement with it.
By being aware of various terms and laws about crypto taxation, one can reduce complications and understand properly how tax slabs are being obligated on their behalf. One should be aware of taxable exchanges and keep a proper record of transactions and holdings in crypto to reduce unnecessary risks and consequences.