Is Crypto Taxation Complicated and How Many Rules do Crypto Traders Need to Follow

Is Crypto Taxation Complicated and How Many Rules do Crypto Traders Need to Follow

Cryptocurrencies are making massive waves recently, especially with the number of entrepreneurs and individuals trying to make a name in the Fintech sector.

It has impacted several investors, traders, and even Fintech enthusiasts. Cryptocurrencies have been a part of society for the past 3 decades.

In the last 16 years, it has made a significant impact. Hence, the potential of having a tradable asset that is secure, profitable, and has room for growth is fascinating.

Many investors find it mouthwatering and try every possible means to get their hands on it before others. Simply put, it is a race to determine who is more innovative, financially capable, and appeals more to users. In general, crypto rewards innovation.

Cryptocurrencies – An overview

Perhaps, you have some vague ideas about cryptocurrencies. They are digital currencies that use cryptography while operating on a decentralized "Blockchain."

Blockchain is a digital ledger that houses all transactions on a specific cryptocurrency chain. It is a transparent and secure ledger that relies on consensus mechanisms to validate transactions.

These consensus mechanisms include mining, staking, and minting or creating new coins. Crypto is mostly security driven. With crypto, you can store your tokens in digital wallets that send and receive funds quickly and securely.

Crypto taxation - Is it a problem

Many individuals run to cryptocurrencies because of government taxation and several other benefits. If you're new to cryptocurrencies or still a newbie, hearing the term "crypto taxation" might initially seem like a joke or vague knowledge.

But yes, crypto taxation does exist. However, it is different from the regular tax we pay to the government. When you hear crypto taxation, what exactly comes to mind?

Do you think, "Oh! I'd have to pay to switch blockchain networks, download crypto apps, or even confirm transactions". That's technically not how crypto taxation works, and it's not a problem.

Here's why–rules are essential to keep every sector or business alive. Hence, some rules and regulations surround the taxation of cryptocurrency transactions. That's Crypto taxation.

Some of the critical aspects of it include taxable events, capital gains tax on profits, crypto as income, potential international considerations, and reporting obligations.

These are some of the fundamental aspects of crypto taxation. Keep reading as we uncover more knowledge on this topic.

Taxable aspects of cryptocurrencies

Crypto has certain taxable aspects. You may be new to this, but these taxes exist. However, not all countries collect crypto taxes from traders and other users.

Countries like the United States, Japan, Switzerland, Canada, and Australia, amongst others, have placed cryptocurrencies under the taxable assets section. That said, here are some of the taxable aspects of crypto you should know about.

  1. Taxable events

Events include buying or selling cryptocurrency tokens, trading between cryptocurrencies, mining, staking, and even airdrops. These are some of the events that are taxable under taxable events.

Depending on the governing body, these activities may have varying consequences. Hence, you must keep track of all activities related to the above. You should also maintain detailed records as needed.

  1. Reporting obligations

This section applies mainly to crypto traders. Traders are expected to fulfill report obligations. These obligations include keeping meticulous records of transactions, including dates, amounts, values, and other important information.

While some countries or jurisdictions may have specific reporting forms, others would rather see your records. Documenting your gains and losses allow the body to correctly calculate your tax to avoid over-taxation.

  1. Capital Gains Tax

Crypto is a business for specific people or companies. In a business, you want to make profit. Hence, a tax is placed on the profits made from selling or exchanging cryptocurrencies -Capital Gains Tax.

The tax rate could depend on the duration of holding the crypto and your specified income bracket. Ensure you calculate the token's original cost and the gain or loss incurred when it is exchanged.

  1. Crypto as Income

Crypto is more than an investment. People make daily incomes from crypto. If you get paid for your products or service via crypto, the value of the tokens received at that time is taxable.

  1. Losses and Deductions

Some jurisdictions allow taxpayers to offset crypto gains with losses within a specific tax year. That means you can cancel certain profit and loss taxes as an individual who trades crypto.

Suppose you buy Cardano and make a loss via trading; you can cancel tax payments from your profit or your ordinary income. These deductions allow traders to comfortably pay tax without considering the financial burden.

  1. International Transactions

Cryptocurrencies are used all over the world. It knows no boundaries. However, the same feature applies to tax obligations. Taxation applied to certain international transactions.

If you have foreign accounts or assets, you may incur foreign taxation depending on the policy under such jurisdiction. Try to understand the tax implications under the foreign jurisdiction you fall under.

Crypto taxation vs government taxation

While crypto taxation specifically places taxes on cryptocurrency transactions and holdings, they aren't specific to all countries. Tax laws related to cryptocurrencies are only present in selected countries, and they involve taxation on mining, airdrops, trading cryptos, and exchanging.

However, government taxation on the other hand refers to the taxation of income, sales, property, business, and several others. The reason most people trust crypto as a reliable investment and source of income is because they feel that banks aren't doing enough, security-wise.

Crypto Taxation is beneficial to society. It isn't a problem since you'd still benefit from the tax you paid. However, it becomes an issue when the tax to be paid is randomly calculated. Such errors could lead to over-taxation. 

When it comes to cyber security, crypto offers security for its users, making it a sure bet.

How To File Crypto Taxes

Paying your crypto tax is easy. However, the amount to be paid may vary, depending on your jurisdiction and the regulations involved.

To reconcile your capital gains and losses, you must use Form 1040 Schedule D and, if necessary, Form 8949 when reporting your crypto activity.

Line 7 of Form 1040 is where you report your total capital gains or losses. So, if you fall under such jurisdiction, here's what you need to know: 

  • Know Your Tax Obligations

Understand the tax laws and regulations that apply to cryptocurrencies in your jurisdiction. To understand your tax obligations, consult tax authorities or seek professional advice.

Visit the necessary websites, and ask in forums, associations, etc. Check any other tangible organization that can help with taxation.

Sometimes, you might need to make phone calls; please do. Ensure you're on the right side of the law. 

  • Keep Detailed Records

Keep detailed records of all cryptocurrency transactions, including dates, amounts, values, counterparties, and supporting documentation.

These records will assist you in calculating your tax liability accurately. You should have a journal or a spreadsheet for these records. It will be helpful.

  • Determine Taxable Events

Find the taxable events carried out within the tax year, such as selling, trading, or exchanging cryptocurrencies and any cryptocurrency received as income or mining rewards.

Categorize each transaction to comply with your jurisdiction's tax laws.

  • Calculate Gains and Losses

Have a journal for recording gains and losses. Estimate any profits or losses for each taxable event.

It involves calculating the original value of the cryptocurrencies involved in the transaction and the fair market value at the time of the transaction. The difference between the two represents the gain or loss.

  • Complete Tax Forms

Ensure you fill out the correct tax forms, as your jurisdiction requires. It may entail using specific tax forms to report cryptocurrency transactions in more general tax forms.

Make sure to accurately report your profits, losses, and other pertinent data as necessary.

  • Report on Schedule

Comment your crypto-related income, gains, and losses on your tax return's appropriate schedule or section.

Follow the instructions provided by your tax authority and report all required information accurately.

  • Pay Taxes Owed

This section applies to individuals that haven't paid their taxes at all. It is easier to bear if crypto is included as a more general tax. However, if you're new to a country, you might need to be made aware of its rules, and this might cause a delay in tax payments.

If you fall under this category, here's what you need to do—Check the accepted payment methods and follow the instructions provided by your local tax agency. Always ensure you stay on the right side of the law.

  • Seek Professional Assistance

Suppose you have any questions about the filing process or have a complicated tax situation, you can seek the advice of a tax professional or accountant specializing in cryptocurrency taxation.

They can help you navigate the process, ensure accurate compliance, and optimize your tax situation.

Crypto taxation simplified

As vague as it sounds, specific complex terms are easily understood when explained adequately. Taxation is essential, irrespective of how unnecessary it seems. Why? it helps us enjoy better amenities -I'm sure you already know these facts. 

Crypto taxation is similar to regular government taxes. The only difference is that not all aspects are taxed. Also, not all countries require cryptocurrency to be taxed. So you see, filing your crypto tax isn't hard; it requires asking the right questions and patiently listening.

Author’s Bio

Ale Oluwatobi Emmanuel is a freelance SEO content writer for SaaS and web 3 brands. With several published by-lines on notable tech websites, he’s passionate about tech, and the innovations that come with it. In his leisure, he listens to music and plays classical piano. Reach Ale via