Cryptocurrency was intended to be a form of digital money utilized for daily transactions but later increased in value as it outgrew to be a form of investment. Many countries have already recognized its potential and future implications on the overall economy and started viewing crypto as a digital asset or commodity. The laws and regulations on crypto vary from country to country and there are no uniform international laws governing crypto transactions, investments, or mining. The taxation on crypto also depends on the legal definition given to the digital currency and the tax system in each country. The article will analyze how cryptocurrency is taxed in general and the taxation in countries like the United States and India.
How is Cryptocurrency Taxed?
Investing or trading crypto requires great knowledge to avoid losses in the highly volatile market. It is necessary to understand the legalities surrounding the market especially regulations in tax before investing in crypto. Cryptocurrencies can be converted into real money, and acts as a medium of exchange, meaning that profits or income from crypto is taxable.
Cryptocurrency is taxed like commodities or any kind of property just like stocks or even, kind of like an income tax. When the crypto is traded and a profit is gained, traders need to pay taxes for the capital gain. The amount gained from these assets is taxed based on how the crypto is received and the duration it is on hold. Crypto transactions can be classified into two based on taxation: taxable events and non-taxable events. These events again depend on the country. The following is a table that shows some of the taxable and non-taxable events:
| Non-taxable cryptocurrency events | Taxable cryptocurrency events |
| Donation of crypto to a tax-exempt organization. | Trading crypto for another crypto |
| The purchase of cryptocurrencies with fiat money. | Selling crypto for fiat money |
| Transferring crypto from one wallet or exchange to another wallet or exchange. | Trading, buying, or selling an NFT |
| The purchase of non-fungible tokens with fiat currency. | Using crypto to purchase services or goods. |
The capital gain is again classified as long-term and short-term capital gains based on the longevity of holding the asset. Short-term capital gains are received as a result of the gains from selling an asset owned for one year or less and are taxed as ordinary income. Long-term capital gains are rated less than short-term capital gains and are received by selling an asset after holding it for more than a year.
Cryptocurrency taxes in the United States
The Internal Revenue Service (IRS) regulates crypto taxes in the US and classifies them as properties to determine taxes. Taxable events in the United States are based on capital gains like selling cryptocurrency for fiat money, exchanging one cryptocurrency for another, using cryptocurrency to purchase goods or services, and receiving cryptocurrency as payment for services rendered or as a result of mining or staking activities.
Short-term capital gains from selling assets held for less than one year are taxed as ordinary income and the rates range from 0% to 37%. 37% is the highest as per 2024 tax rates and depends on the tax bracket. Long-term capital gains from selling assets held for more than a year are taxed at a comparatively reduced rate than short-term gains, 0%, 15%, or 20% depending on the taxable income. Traders and investors are required to report all taxable events. This reporting process will be simplified with the new regulations from January 1, 2025, by tracking cost basis per wallet.
Cryptocurrency taxes in the United Kingdom
The crypto tax regulations in the UK are slightly different from the US and both long-term and short-term capital gains are the same. Investors who earn more than 50,270 pounds have a tax rate of 20% and for those earning less than 50,270 pounds, the tax rate is 10%.
From April 2023 to March 2024, the basic tax exemption is 12,000 pounds, and capital gain applies only to gains exceeding the limit. The UK has a rule that disallows tax loss harvesting, called the wash sale rule, which restricts selling assets and repurchasing them not before 30 days. Wash sale is a loophole traders use to skip the tax liability of capital gain by selling assets at a loss and repurchasing them shortly after. Getting paid in cryptocurrencies, staking rewards, crypto mining, and airdrops are considered as regular income to be considered under the regular income tax bracket.
Cryptocurrency taxes in India
India classifies cryptocurrencies as Virtual Digital Assets (VDAs) under the 2022 Budget and has implemented a much stricter tax regime. The country’s taxable income calculations are straightforward given the formula: Gains = Sale Price – Cost Price, and the tax owned is 30% of the calculated gains. A rate of 30%, considered a flat tax rate, is applied to all profits from trading, selling, or even trading with other cryptocurrencies.
A flat tax rate is implied upon both business income and capital gains. A Tax Deducted at Source (TDS) of 1% regardless of profit or loss is deducted from the total sale amount. This TDS is applicable for all crypto transactions above 50,000 rupees or 10,000 rupees in some specific cases. As cryptocurrencies are categorized under VDAs, the ITR form has a section to report the cryptocurrency gains, as every citizen is required to report crypto incomes if any.
Conclusion
Most of the countries have realized the future and the economic potential of cryptocurrencies. Countries like the USA, UK, and India among many other countries have taken their stance by implementing laws and regulations to lawfully incorporate crypto into the economy. Tax regulations for crypto vary from country to country but have a common point of viewing them as a commodity or taxable asset. Understanding the regulations of the country is crucial as it helps to make informed decisions and proper financial planning for these growing digital currencies.