Cryptocurrency trading is something that has become a popular activity around the world. While this is exciting and there are a plethora of trading opportunities for beginner traders as well as professionals, one of the main considerations, before traders participate in this market, relates to tax implications.
Many crypto assets, such as Bitcoin, are considered as a medium for daily transactions, but they are yet to gain traction as official currencies. As with many other tradable instruments, cryptocurrencies may be subjected to certain kinds of taxes, depending on the region in which the trader resides.
Crypto Tax and the IRS
Crypto assets are considered virtual currencies that can be bought and sold on a cryptocurrency exchange. As crypto trading has increased in popularity and more traders are making cryptocurrency gains, the Internal Revenue Service (IRS) has turned its attention to these digital currencies.
However, according to the IRS, crypto assets are considered property instead of cash or currency. This means that the sale of cryptocurrency is regarded in the same manner as stocks and other investments.
By purchasing cryptocurrency with cash and holding, it is not considered a taxable transaction. However, selling and exchanging cryptocurrency for a profit is considered taxable income while using it to purchase goods and services is considered a taxable transaction.
Because of this, crypto traders and investors are required to report their virtual currency transactions for relevant the year as capital gains says Madelien van Der Merwe from Forexrecommend.com
Australian Tax Laws versus Cryptocurrencies
In addition to this, Australia has also published tax treatment of cryptocurrency, indicating that being involved in transactions with crypto assets, regardless of whether you buy or sell them, can have tax consequences.
When cryptocurrency investors dispose of their cryptocurrency for profit, capital gains tax (CGT) events are triggered. If traders make a capital gain on the disposal of cryptocurrency, some of all of the gains may be taxed.
In addition, if the disposal of cryptocurrency is a part of a certain business that the individual carries on, the subsequent profits made will be assessable as ordinary income instead of capital gains.
However, if some individuals or companies carry on a business that involves transactions with cryptocurrency, the stock trading rules will apply instead of capital gains tax rules.
South African Crypto Investors and Tax
While in South Africa, the South African Revenue Service (Sars) has started auditing cryptocurrency investors, demanding that these traders provide proof of their transactions from different cryptocurrency exchanges.
However, the tax implications for cryptocurrency trading and investing in South Africa has yet to be clarified. It is yet to be seen whether cryptocurrency transactions will be taxed as capital gains by a central authority.
These uncertainties exist because of the complexity that surrounds crypto transactions, including:
- Hard-forks, which occurs when one crypto asset splits into two separate coins.
- Airdrops, where new coins are sent to owners who already have existing crypto assets.
- Staked rewards, which earn crypto investors interest
- Hosts of other cryptocurrency-specific developments.
One of the major issues that authorities may face, is crypto investors hiding taxpayer non-compliance by hiding crypto assets across different undetectable wallets. However, once these virtual currencies are sold to recognised service providers, they become detectable, which will expose non-compliance.
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