As blockchain technology continues to expand its reach into industries like FinTech, Property Technology, Insurance Technology, and so much more, the role of cryptocurrency will continue to expand alongside these projects.
You don’t have to look any further than NFTs to see how cryptocurrency can be intertwined with new blockchain technology. Artists have to spend ETH to mint an NFT on the Ethereum blockchain, and while this cost was largely hidden in the fees charged by NFT exchanges, it represents a simple example of the growing uses of crypto in transactions.
The downside to the expansion of crypto transactions is that many crypto investors are unaware of the tax implications behind them. Trading any cryptocurrency can be a taxable event, whether you sold it for fiat currency, traded it for another cryptocurrency, or exchanged it for a good or service.
When Do You Owe Taxes on Cryptocurrency?
There are several triggers that will cause crypto investors to owe taxes on their transactions. They include:
- Selling cryptocurrency for a profit
- Trading one crypto for another
- Mining cryptocurrency
- Buying goods or services with cryptocurrency
How Much Do you Owe in Crypto Taxes?
Calculating your crypto taxes can be complicated, especially if you’ve been trading crypto for several years without understanding your tax obligations.
When you sell crypto for fiat currency, it’s relatively simple to figure out. If you made a profit on the sale, i.e., you sold the currency for more than the original purchase price, subtract the original purchase price from the sale price. In some cases, half of that profit can now be taxed as a capital gain, and it will be added to your taxable income. However, if you trade frequently, it may be considered business income, and 100% of the amount will be added to your taxable income.
You may also be able to reduce this taxable amount by claiming a capital loss. When you lose money on an investment, you can apply the capital loss against gains made with other assets. How this works exactly depends on what country you live in.
When you exchange crypto or buy goods or services with it, you are usually considered to have disposed of the asset. You are considered to have sold it at Fair Market Value at the time of the transaction. Keep in mind that you should write down the price of the cryptocurrency when you use it to buy something.
What Can You Do If You Owe Crypto Taxes You Did Not Know About?
If you’ve made cryptocurrency transactions in the past and not filed your taxes, you can benefit from working with a Crypto Tax Lawyer to put your finances in order.
With the help of the right lawyer, you should be able to find out how much you owe in taxes and how to refile your taxes without facing undue penalties. You will have to pay what you owe, but if you can refile your taxes by filing a voluntary disclosure program application before being audited, you should be able to escape harsher penalties.
