In most parts of the world, there is not a lot of clarity about how government regulations interact with cryptocurrencies. A lot of crypto enthusiasts do not even know whether or not they should treat their crypto income as capital gains and file tax returns accordingly. Are cryptocurrencies subject to capital gains tax? Let’s find out!
Please bear in mind that this particular discussion on the topic is limited to the United States.
Although similar models are followed in most of countries where crypto use is common, you must check for information specific to the country you are in, and consult experts to know exactly what you should be doing.
Crypto and Capital Gains Tax
Although cryptocurrencies were devised to function as currencies: digital money to work as a store of value and a standard of exchange, they are more commonly used as an asset that you buy and sell to make profits on them.
Basically, simply put, cryptocurrencies today are primarily used as a vessel for investment. Therefore, according to the IRS (Internal Revenue Service) in the USA, your crypto income is indeed subject to capital gains tax.
Even in a country like India, where clear regulations do not yet exist, experts suggest including cryptocurrencies under the purview of the capital gains tax.
Different countries have different rules about calculating capital gains tax and ascertaining what counts as short term and what counts as long term.
In the USA, it is considered to be a short term investment if you have been holding the crypto holdings in question for a year or less.
Usually, you have to pay a higher rate of capital gains tax if you have kept your crypto holdings for a short term. If you have held on to your crypto for longer, you will likely need to pay a lower rate of tax.
Fortunately, the wash sale rule does not apply to trading of cryptocurrencies, and this helps account for how much the price of Bitcoin (and other cryptocurrencies) moves.
If you wish to avoid paying the capital gains taxes on your crypto income altogether, you may choose to use your crypto for gifting purposes, use the option of an international life insurance to purchase the crypto, set up an offshore LLC to manage your crypto holdings without attracting taxation, purchasing crypto with a self-directed IRA or a Solo 401(K) or trade your crypto holdings from Puerto Rico. All these instances will allow a US citizen to avoid capital gains taxes on their crypto.
Author: Rushali Shome