Cryptocurrencies like Bitcoin can be a tool for building personal wealth, mainly if you invest in digital coins over the long term. Don’t go crazy and blow away your money, but be willing to experiment with investment strategies. You can invest directly in cryptocurrencies using one of the top-rated exchanges, like Binance. If you don’t know how to buy crypto, don’t fret because you’ll catch on pretty quickly. Another way to gain exposure to digital assets like Bitcoin is to buy shares in a company with great exposure, such as a mining company that an exchange-traded fund represents.
Having a solid plan about what you’ll do with your crypto gains is highly recommended. Tempting as it may be to spend your earnings on a luxury purchase, keep in mind that some assets depreciate with time. The best thing you can do is to reinvest your crypto gains. If you have a long investing timescale and don’t need additional income, be smart about what you do with the money you’ve made. Knowing how to invest in lucrative channels requires research and good decision-making skills. Also, be sure your financial situation is in good shape before investing.
If You Make Money on Crypto, Tell the Tax Authorities About Your Income
Over the past couple of years, some investors have made fortunes from trading digital assets. Cryptocurrency is considered property for income tax purposes, meaning that you must pay taxes if you realize a gain. Ignoring this topic can be dangerous because you may incur interest, penalties, and even criminal charges for not declaring income on which tax is due. For this reason, keeping a record of your gains and losses is advisable. The tax authorities actively search for undeclared or under-declared income, and information can come from various sources, such as Internet information, door-to-door inquiries, and reports from public members or relatives, to name a few.
Cryptocurrency gains are taxed depending on how and when you acquire them. When you sell, you have a capital loss or capital gains. Should your proceeds exceed your basis, you have a capital gain; it’s the gain that’s taxed, not the amount of money you receive. Holding digital assets like Bitcoin holds tax consequences that can result in liability. So, if you’ve been regularly buying BTC for the past years and now you’ve decided to sell some, it can be considered a gain, and you’ll pay a tax rate. The difference between the sales price and your basis is the long-term capital gain.
Crypto Taxes: A Quick Guide to European and US Rules
The rapidly growing economic importance of cryptocurrencies has led to the application of income tax if individual earnings are realized. Digital assets may be subject to capital gains when exchanged or sold at a profit. The European Union hasn’t issued any definitive ruling concerning the status of cryptocurrencies, yet transactions involving the exchange of goods and services trigger a tax audit. Digital assets aren’t allocated nor guaranteed by a central bank or public authority. Bitcoin is legal in nearly all EU states, qualified as a financial instrument and exchanges, brokers, and other companies will face harsh rules aimed at protecting customers in the near future.
Currently, European tax authorities don’t have access to information such as identity, beneficial owner, the origin of assets, and so on. The European Commission suggested amending the Directive on Administrative Cooperation to encourage the exchange of information. Tax authorities would receive much-needed data on purchases and sales of cryptocurrencies. Taxation varies by country in Europe. In Germany, for instance, digital assets are taxed. Short-term capital gains from crypto holdings and additional income from mining and staking are subject to income tax. Nonetheless, there’s an allowance of 600€ for digital assets bought and sold within the same year. Apart from that, all cryptocurrencies held for more than a year are tax-exempt.
In the US, the IRS categorizes cryptocurrency as property, meaning that taxation is at the same level as stocks and bonds. Tax rates depend on your income, tax filing status, and the length of time you owned the digital assets before selling them. Submitting your crypto reports for the last year and the audits covering the previous three years is mandatory. To figure out if you own taxes, you need the cost basis, that is, the total amount you paid to get hold of the cryptocurrency. In closing, compare that to the sales price or proceeds when you last used the digital assets.
Failure To Report Crypto Gains Can Be Costly
You may dread listing your Bitcoin earnings from the previous year on your tax return, but disguising taxable activities might get you into trouble. You should discuss your situation with a tax professional, such as a tax return preparer or a lawyer. As mentioned, authorities resort to different methods to keep tabs on the cryptocurrency industry, so not paying taxes on your gains can be risky. If you ignore tax rules and regulations requiring reporting gains and losses on cryptocurrency trades, a sum of money will be punished. You’ll most likely face a full-time audit if you get caught underreporting your crypto investment earnings. Depending on the severity of the evasion, you can face years in prison.
Cryptocurrency holdings fall under the definition of current income, so it’s subject to taxation at the point of inflow. Gains and losses should, therefore, be reported, so treat the issue with particular attention. You’ll need to provide tax authorities information such as the name of the cryptocurrency, the date you acquired it, the date you sold/traded it, the proceeds/sales price, the cost basis, and the total gains/loss. In the years to come, many developments are forecasted to provide a clear idea of taxation policies. Regardless of how much tax you have to pay, it’s still a good idea to invest in digital assets like Bitcoin.
If you want to minimize crypto taxes, hold your tokens until the short-term gains transform into long-term gains. More precisely, choose a cryptocurrency, invest money you can afford to lose, and hold the asset for the long term.