South Korean government has cracked down on its largest cryptocurrency exchange, BitHumb, and announced that it will charge 24.2% taxes on all cryptocurrency transactions. The announcement has sent ripples of panic among the South Korean public, one of the biggest investors in Bitcoins and Ethereum. Just last month, the country had banned opening of new crypto accounts in an effort to contain the blockchain frenzy.
Are Bitcoin & Crypocurrency Gains Taxable?
South Korea’s stand may be considered too stringent but not entirely unexpected. Most governments are eyeing cryptocurrency transactions suspiciously and it would be advisable for investors to maintain complete records of any sale, purchase, or exchange of Bitcoins they do. Experts say that since blockchain transactions are conducted anonymously and from peer to peer, tax evasion and money laundering become looming possibilities. Hence, there is need for tax regulations.
Recently, America’s taxman, Internal Revenue Service (IRS) sued the country’s largest crypto wallet and exchange, CoinBase, and won the lawsuit. IRS ordered CoinBase to hand over records of all customers who had made a profit of more than $20,000 on cryptocurrency transactions between 2013 and 2015. CoinBase had to reveal 14,355 anonymous account holders who had done more than 9 million transactions using the exchange. Out of these, only 900 customers had declared their crypto earnings in their annual tax forms. IRS is bound to take strict action against these individuals to set a precedent against tax evasion. The incident has alarmed crypto aficionados who were clandestinely minting money and shirking their tax responsibilities.
What you don’t know about Bitcoin taxes
Income from cryptocurrency will certainly be taxed, but the amount of tax payable would depend upon two factors- nature of transaction and amount of profits. Accordingly, any of these two taxation models may be applicable to Bitcoin gains:
Income tax: Investors (individual and not companies) who gain any income from Bitcoins within a year of purchasing them, have to pay a percentage of gains as income tax. This percentage increases as gains increase, just like for any other income. So, if an employee is being paid his salary in Bitcoins or any other digital currency that is convertible into “hard cash”, he has to pay taxes.
Capital gains tax: Investors, who hold Bitcoins as investment for more than a year and then sell them for a large profit, are liable to pay a percentage of profits (usually less than 15%) as capital gains tax.
Bitcoin profits will be taxable at different rates depending on whether they are treated as asset, commodity or “like-kind” goods. Read about taxation policies of countries here and see a full-sized map with countries’ stand on cryptocurrency taxation.
Tax Treatment of Cryptocurrency gains in Different Countries
What about capital losses on Bitcoin transactions?
Presently, the IRS says the maximum amount of capital losses a person can declare annually is $3,000. If your losses exceed this amount, they are carried forward to the next year and can be deducted from capital gains of that year. This process continues till all losses are set off.
Other concerns of Cryptocurrency traders
Cryptocurrency taxation seems pretty simple, but actually there are finer details to consider:
Should investors be concerned or are these isolated occurrences?
2018 is going to be a pivotal year for crypto regulations. Governments and tax bodies will bear down heavily on dubious crypto currency investments and transactions. China, for example, has imposed an indefinite ban on crypto currency exchanges and Initial coin Offerings (ICO). You should be prepared to be accountable for any gains you make from blockchain payments, especially using digital currencies.
How can people invest in cryptocurrencies and also be on the right side of law?
Don’t expect much help from crypto exchanges to provide you with records or documents of transactions you conduct there. The onus of proving that you are a law-abiding citizen of the state lies with you. Treat gains from cryptocurrency transactions just like you would any other asset. Maintain complete records of each transaction. Invest only when you own the private key to an account. This way you can be sure that you are doing legitimate business and not being used by crypto exchanges to make a profit on their personal ledgers.
- Take your accountant’s guidance to compute tax on cryptocurrency gains
Are all digital currencies taxable?
Although the IRS specifies only Bitcoin gains as taxable, but all cryptocurrencies that are “convertible” into Bitcoins or that can be used as a substitute of real cash, are covered by tax laws. Not all of the 1,100 digital currencies that exist today are convertible. But that doesn’t mean that you can avoid paying taxes. IRS is closely watching growth of all cryptocurrencies and activities of frequent speculators. All we can guarantee is that sooner or later, the taxman will catch up on undeclared gains.
Are present accounting software sufficient for computing tax from crypto income?
Watch this space for more breaking news, trends, and analysis on blockchain technology and digital currencies.