Naturally, as these investments have blossomed so have questions surrounding their overall legality and taxation status.
In fact, as digital currencies have continued to garner an increasing amount of mainstream traction across the globe, more and more governments have started to devise frameworks so as to help keep a close tab on their citizens that have been facilitating monetary transactions using this yet nascent asset class.
Also, while some governments like El Salvador, have adopted Bitcoin as legal tender, a number of major economies including the United States, the United Kingdom, France, etc have refused to do so, thanks in large part to the fact that digital assets allow individuals to undermine government authority by circumventing any capital controls that may be in place.
Furthermore, by completely eliminating the need for a central monetary authority (such as a bank) or any other financial intermediary, cryptocurrencies have the potential to destabilize the financial systems that are in place globally, resulting in potential tax evasion.
Keeping a tab of one’s crypto transactions is important
As the use of digital currencies has spread, tax agencies have continued to calm down on people using cryptos for tax exavion purposes. For example, the United States Internal Revenue Service (IRS) now treats BTC as property, which essentially means that the token is taxable in a manner that is akin to stocks or real estate. In this regard, we can see that if a person were to buy a Bitcoin for $50,000 and then sell it for $63,000, then he/she is liable to pay a tax on the $13,000 profit accrued as a result of the transaction.
This is exactly the reason why it has become important for individuals to keep a close tab on their capital gains as it is entirely possible that govt. agencies like the IRS may look to crack down on any individuals facilitating regular digital currency transactions that are classifiable as ‘taxable events’.
Some other noteworthy taxable events include:
- Mining cryptocurrencies for recreational purposes requires individuals to pay taxes in the eyes of the government. Infact, as per officials working for cryptocurrency tax software TaxBit, mining proceeds are liable to tax rates varying anywhere between 10% – 37% — something not a lot of people may not be aware of. In this regard, it is important for miners to remember that they are required to pay taxes on the “fair market value of the mined coins at the time of receipt,”.
- Earning interest on one’s holdings is also liable to tax, with exchanges like Binance, Coinbase recently sending out Form 1099-MISC to individuals earning more than $600 via activities such as staking, pool rewards, etc.
The government crackdown on crypto is real
With the total market valuation of the crypto sector rising from $1 trillion to $2.5 trillion over the course of 2021, governments all over the world have made it abundantly clear that they too want a piece of the action. In that sense, tax regulators globally have been increasing their efforts to subpoena centralized crypto exchanges, forcing them to provide data on any non-compliant taxpayers.
To put things into perspective, in the US, individuals having conducted transactions worth $20,000 worth of crypto between 2016-2020 (via trading platforms such as Kraken, Circle, Coinbase) were required to report their crypto dealings to the IRS in a timely manner. Not only that, a couple of years ago, the IRS issued warning letters to more than 10,000 people who had allegedly failed to reveal their crypto income in a timely manner.
The letters gave the recipients a total of 30 days to respond to the government body, failing which the individuals in question lay at risk of having their tax-profiles scrutinized heavily. In fact, these letters were issued once again in 2020 and 2021, suggesting that tax authorities are extremely serious when it comes to keeping a tab on the crypto activities of their citizens.
There is no doubt that as we move into an increasingly decentralized future, tax authorities globally will continue to clamp down on the use of cryptocurrencies for illegal, tax evasion purposes. Therefore, moving ahead, it will be interesting to see how the future of this fast-evolving space continues to play out.