What are the Fiscal Aspects of Cryptocurrency Investing?
The Fiscal standing of Digital Currencies
At the time of writing, cryptocurrency investments are at an all time high globally, which begs the question: are there any fiscal repercussions to all these transactions? In order to determine such a thing, it is important to first of all establish that the fiscal standing of digital currencies has only recently become a discussion of particular interest to investors, given how new and ever-changing the industry is at the moment.
In order to focus our lens into this space, it is vital to remember that fiscal policies towards cryptocurrency investment may and effectively do vary from country to country.
The decentralization of crypto in fiscal and legal spaces
The fact that cryptocurrency is decentralized from any authority grants it both privileges and disadvantages when it comes to taxation and legality. For example, it is easier to be the victim of fraud when dealing with crypto rather than tangible currency, and, as a result of its decentralization, it may also be more difficult to seek legal help in such cases.
When it comes to the fiscal aspect of crypto investing, a slightly clearer image emerges. One that, as indicated above, varies from country to country. However, there are some rules that apply pretty much everywhere. For example, profits or losses on exchange movements between virtual currencies, much like standard tangible ones, are taxable. The same applies for the profits and losses of companies that carry out transactions through crypto.
The American case
When it comes to the fiscal aspect of cryptocurrency investing, the most research and publications by far have been carried out in the United States. In the US, crypto is not seen as simple currency, but rather as a property or capital asset by the IRS (Internal Revenue Service), and therefore taxed in the same manner. As a result, investors will need to pay capital gains taxes regardless of where the crypto was acquired.
It is however unclear whether investors need to pay any additional tax when acquiring their digital currency on the foreign exchange are required to face any other fiscal measures. According to Investopedia and CNBC, any person with over $10,000 abroad usually needs to fill out a tax report. Whether that is also required for digital currencies is pretty unclear.
When are taxes paid over cryptocurrency
Unlike what an investor may think, the act of buying and/or holding on to a digital asset is not a taxable action on its own, even if the cryptocurrency’s value grows over time. In order to have to be taxed on crypto, an event such as a sale must first occur, per the IRS. Both users and crypto exchanges may be required to file such taxes.
According to The Motley Fool, “Crypto exchanges are required to file a 1099-K for clients who have more than 200 transactions and more than $20,000 in trading during the year.”
In addition to selling digital assets for standard currencies, other events traders may be liable to pay tax for in the crypto world are the exchange of crypto for other crypto, and the usage of crypto for the purchase of any type of goods or services. They are, however, only taxable in the case that the value of the crypto you are using has risen.
Therefore, one could conclude that the most similar asset that is taxed in the same way as cryptocurrencies is stocks, especially when considering that tax rates for crypto gains are almost the same as capital gains taxes for stocks.