What is the way to deal with cryptocurrency taxes?

How does the whole tax process work?

Crypto and Bitcoin have undoubtedly diverted the public’s attention in recent years. Governments are interested in the blockchain, which is the sphere’s fundamental technology. The applicability in the era of sceptic regulators is shaky. While some people support blockchain, they are opposed to cryptocurrency. Most governments are increasingly accepting of cryptocurrencies and are carefully positioned themselves to profit from the huge price increases of recent years.

Bitcoin is emerging from the ashes of rejection and finding acceptance in mainstream banking less than 15 years after its creation. The most popular cryptocurrency today has a market capitalisation of almost $2 trillion. Others that are classified as digital assets include ETH, Litecoin, DeFi tokens, and even NFTs.

In most countries, cryptocurrencies are considered property

While cryptocurrencies disrupt procedures, prompting remittance providers to adapt and even integrate them quickly, most jurisdictions’ binding regulations are still hazy. Apart from El Salvador, which just made Bitcoin legal tender and accepted it to cover debts and taxes, countries all around the world use different classification standards.

Cryptocurrencies, often known as virtual currencies, are classified as property in countries ranging from Japan to the United States and other innovative crypto jurisdictions. As a result, owners of these digital assets must file tax returns indicating capital gains that match the tax authorities’ records. Regardless of whether the digital asset in question is a utility or an investment contract, this is the same.

Bitcoin is the sole asset that regulators have said is a utility as of October 2021. That is, the token is community-driven, decentralised without a central middleman, and the coin serves a purely utilitarian function, providing no return on investment to its holders. Although Ethereum (ETH) may qualify as a utility, most cryptocurrencies qualify as securities, according to regulators in the United States, based on the SEC’s formal statements.

The Internal Revenue Service’s Cryptocurrency Tax Campaign (IRS)

In 2014, the IRS issued Notice 2014-21, 2014-16 I.R.B. 938 PDF, explaining that virtual currency is treated as property for Federal income tax purposes and providing examples of how longstanding tax principles applicable to transactions involving property apply to virtual currency. 

If you held the virtual currency for one year or less before selling or exchanging the virtual currency, then you will have a short-term capital gain or loss.  If you held the virtual currency for more than one year before selling or exchanging it, then you will have a long-term capital gain or loss.  The period during which you held the virtual currency (known as the “holding period”) begins on the day after you acquired the virtual currency and ends on the day you sell or exchange the virtual currency.

As a result, it’s critical for cryptocurrency investors and traders to stay on top of things. This entails being up to date on the best crypto tax procedures and staying on the right side of regulators like the SEC.

The Internal Revenue Service (IRS) launched the Virtual Currency Compliance campaign in 2019 to address non-compliance among digital currency users, letting residents and taxpayers know that the agency was up to date on crypto developments and was closely observing how the scene unfolded.

The tax collector, as part of the corporation, sent out thousands of warning letters to customers, requesting that some file updated tax returns to correct a difference with the agency’s records. Some users, mainly traders who earned a fortune during the 2017 ICO craze, were unaware of their tax duties and failed to file returns, according to reports. This was largely owing to the United States’ ambiguous laws on crypto taxes.

Being on the Right Side of the Law and Meeting Your Crypto Tax Obligations

There was Letter 6173, which requested users to answer within a month, and CP 2000, which alerted consumers that their returns didn’t match their records and listed the fault as well as the appropriate interest.

When a user has to take action, they can dispute the total amount owing by providing supporting papers to back up their claim. It can be done manually or with the help of a cryptocurrency tax service. The latter method is more convenient for saving time while maintaining good accuracy.

What Is One of the Ways To Deal With Cryptocurrency Taxes?

Cryptocurrencies are properties in the United States — and most other countries — regardless of the crypto tax instrument used. As a result, knowing the tax implications of trading, dealing, or earning them is crucial. Here are three strategies to deal with bitcoin taxes to be secure and avoid penalties:

1. Always report any and all types of cryptocurrency transactions.

Because digital assets are securities, a trader may believe that exchanging one for another is tax-free. The IRS, on the other hand, declares unequivocally that these are all taxable events that must be reported annually.

1. To report cryptocurrency transactions, always use the correct form.

Whether you’re trading crypto, mining it, investing in it, or utilising it as a medium of exchange, each type may require a distinct filing form. As a result, a user must be careful to fill out the relevant IRS form in order to accurately capture the transaction and calculate the applicable tax.

1. Always keep a record of all cryptocurrency transactions.

It’s crucial, especially given the SEC’s definition of cryptocurrency as a digital asset. Creating and keeping a record of all relevant transactions aids in creating its foundation. As a result, it’s easier to calculate profit or loss, which helps with tax deductions. Although traders can do this manually, it is recommended that they use a professional crypto tax tool service provider to automate the process and keep everything organised.

Summary

Crypto users must give Caesar what is rightfully his. It’s unavoidable, given the severity of the punishments and the length of time spent in prison for violators. As a result, traders and investors must read from the same page as tax officials.

Manual crypto tax reporting is possible, but it is time-consuming and resource-intensive. Active traders, investors, Airdrop receivers, and DeFi lovers, on the other hand, may find it confusing. As a result, employing a trustworthy and global crypto tax tool can save time, money, and, most importantly, improve accuracy to avoid unnecessary discrepancies.

In the case of the European Union, the near future is close to regularization.

What is the MiCA proposal?

The MiCA proposal (markets in crypto-assets) is the name given to the draft European regulation on crypto-assets markets, which aims to regulate this type of markets through a general framework for the entire European Union, since there is currently no common regulation (in many cases, not even state regulation), leaving in the hands of arbitration those cases in which conflicts have arisen between the parties.

Therefore, the MiCA regulation is the EU's response to the development and advance of cryptocurrencies and other types of cryptoassets and the technologies that make them possible, such as blockchain. The MiCA aims to catch up with this digital and financial revolution and provide legal certainty to a market that right now seems to lack it, as different cases of bitcoin scams have highlighted.

What is the objective of the European regulation for the regulation of cryptoassets?

The main objective pursued by the MiCA is the regulation of the cryptoassets market, which are currently not considered within the EU financial legislation as financial assets or electronic money, leaving out the so-called security tokens, which can be considered as a financial instrument (and would be regulated by the MiFID II Directive), and those cryptoassets issued by central banks.

In addition to this objective, the crypto-assets market regulation also aims to:

Create and implement a regulatory framework that gives legal certainty to all participants in this market and helps to foster its development in the EU.
Encourage innovation and development of cryptoassets, without neglecting the protection of investors and consumers, promoting a more general use of blockchain-based technologies.

Ensure financial stability, especially as more stable global cryptocurrencies (cryptocurrencies that, unlike Bitcoin or Ether, have a value based on a specific currency) come to market.