Thousands of cryptocurrencies are there – like Bitcoin, Ethereum, Dogecoin, Tether, and Ripple – and all of them are considered capital assets. Most of these cryptocurrencies are convertible digital currencies, which act as a medium of exchange that can substitute real money. This means any significant earnings or income from cryptocurrencies are taxable. However, you don’t have to report your crypto activity to the IRS if you simply purchased and held it. If your cryptocurrency is worth more than it was when you bought it, you must pay taxes on it if you sell it or use it in a transaction. This is because the IRS has considered cryptocurrencies as an asset from which they can earn taxes. However, you have understood the tax implications of cryptocurrencies.
Are crypto-to-crypto trades taxed? This is one of the main concerns raised among investors. This article will cover the answer to this question by exploring the tax implications associated with crypto-to-crypto trading.
Are Crypto-to-crypto Trades Taxed?
The tax implications on crypto trading vary from one country to another, depending on the regulation and legality. In the United States, every crypto-to-crypto trade is taxable under law and every transaction should be recorded and reported on tax returns.
Remember that tax implications on crypto-to-crypto transactions also vary from country to country.
Why are crypto-to-crypto trades taxable?
The Internal Revenue Service (IRS) considers cryptocurrency as a fixed asset instead of currency, treating it as a property, not money. When you trade a crypto asset for another, actually, you are selling one asset to buy another. According to the IRS, selling an asset is a taxable event.
For example, if you are going to trade Bitcoin for Ether, you will sell your Bitcoin and purchase Ethereum. The action of selling your Bitcoin is a taxable event.
A taxable event is triggered by each trade you make. You will be liable for taxes if the cryptocurrency you are trading has appreciated in value since you bought it. Monitoring your losses is also crucial because you may be able to deduct them from your taxes.
Common Cryptocurrency Taxable Events
Tax laws are complicated by nature, and during tax season, the tax that cryptocurrency dealers must pay on digital assets and decentralized finance transactions may make matters much more complicated.
Crypto-to-crypto transactions
When you trade a crypto asset for another, you have to report any gains. It is considered a long-term capital gain (or loss) if you keep the original cryptocurrency asset for more than a year. You pay your regular income tax rate on short-term capital gains (or losses) from holdings that are sold within a year of purchase.
Airdrops, Staking, and Mining
Revenue from airdrops, staking, and mining is considered regular income by the IRS. On the day you receive the cryptocurrency as income, you are required to disclose its fair market value. If you choose to exchange these cryptocurrency assets in the future, you will have to file another capital gain tax return.
Selling Cryptocurrency
Cryptocurrency sales are taxable. It is commonly referred to as ‘disposing’ of an asset. You must pay taxes, whether you exchange your assets for money, trade it to buy another crypto asset or swap it for other fixed assets.
Purchasing Assets with Crypto
If you are going to purchase anything, that can be a laptop, car, or even a house, you must have to pay taxes. These actions are considered taxable since you are selling your crypto assets to purchase other things.
Earning Crypto from Employment, Goods, or Services
Receiving cryptocurrencies as a reward for work is considered ordinary income. You must report the actual market value of the cryptocurrency on the day you are paid.
How to Calculate Taxes on Crypto-to-Crypto Transactions?
You have to record and report the gain or loss, every time you make a crypto-to-crypto trade. You can calculate the amount by subtracting the cost basis from the market value at the time of trade.
If the outcome is a positive number, you have a capital gain, and you have to pay taxes on that particular trade. If it is a negative value, it is considered a capital loss, and you can deduct it from your taxes.
Cost basis: The cost basis refers to the amount you used to purchase the crypto asset. This can be the amount of fiat money you used to pay or the fair market value of another crypto asset.
Fair market value: The selling price of your cryptocurrency asset at the moment of exchange is referred to as the fair market value.
Strategies to Reduce Tax Liability
Paying taxes is a frustrating one for many people. However, you can use some strategies to reduce your crypto taxes owed.
Utilizing tax allowance: Many countries in the world allow investors to enjoy a certain amount of capital gain tax-free. This facility helps investors to cash out their money without paying any taxes.
Long-term holding: If you are holding any crypto assets for a long term, then you can benefit from capital gains tax rates.
Spread out trades: You can maintain your lower tax bands and receive a new tax allowance every year by gradually selling and trading your cryptocurrency over a number of tax years.
Harvesting tax losses: Capital gains can be partially offset by selling assets at a loss.
Cryptocurrency taxation software: There are certain cryptocurrency taxation software available, which can be used to keep accurate records of all your trades.
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Conclusion
Crypto-to-crypto trades are indeed subject to taxation, and understanding the nuances of these tax implications is essential for any cryptocurrency investor or trader. This means that any gains obtained from trading one cryptocurrency for another must be reported and taxed accordingly. Traders need to be diligent in maintaining accurate records of their transactions, including purchase prices, sale prices, and dates of each trade. Additionally, traders should consider strategies such as tax loss harvesting to optimize their tax liabilities. As the regulatory landscape of surrounding cryptocurrencies continues to evolve, staying informed about changes in tax laws will be crucial for compliance and effective financial planning.