Most people are aware of the really explosive growth that bitcoin and other cryptocurrencies have enjoyed in recent times. Along with that tremendous growth, there have also been a number of crashes associated with cryptocurrency. However, the growth factor has been so appealing that even a number of inexperienced investors have been attracted by the possibility of huge earnings.
If you’ve been thinking about investing in cryptocurrency, it might be wise to learn about the tax implications associated with it, and how your investing and trading might be affected. To get a complete rundown on all the tax impacts affecting cryptocurrency, you should consult with Asena Advisors, so that you don’t get caught off guard by any developments. You might also collect some good advice on how to go about your trading and investing in cryptocurrency.
What exactly is Bitcoin?
Bitcoin is one type of digital currency, and it is created and owned by electronic means. No single person actually controls bitcoin, and no physical currency is actually printed or minted in the way that dollars or euros would be. Instead, it’s produced by individuals and businesses who operate computers all over the globe, using software that is often specially developed to manage and control cryptocurrency.
Bitcoin is the single most popular and largest example of all cryptocurrencies currently in use, and it was also the first one to be developed. There are several ways that you can obtain bitcoin, starting with making a purchase. In order to buy bitcoin, you’ll need to generate an online wallet after visiting a bitcoin exchange system which connects buyers and sellers.
Buyers can obtain bitcoin by transferring money through online banking methods. You can also ‘mine’ bitcoin using a process by which a computer solves a group of complex mathematical problems, for which success delivers some amount of bitcoin to the user.
The last way you can obtain bitcoin is through providing goods and services, so as to earn some amount of bitcoin. Since it has become a widely accepted virtual currency, bitcoin can be used in almost every country in the world now. There are hundreds of thousands of vendors, if not millions, who currently accept bitcoin as payment for goods and services.
The number of people around the world now using cryptocurrency exchanges is rapidly approaching 200 million, and that figure is certain to grow in the coming months and years. As bitcoin gains even more popularity and widespread usage, it will undoubtedly become one of the most used forms of currency.
How bitcoin is taxed
For the most part, there is no income tax which gets applied if you are not using bitcoin for business functions, and you’re just paying for any services or goods by using bitcoin. Bitcoin is classified as an asset subject to capital gains tax, and this could potentially come into play when one individual sends bitcoin to another individual.
However, there are certain transactions that are completely exempt from capital gains tax, assuming that certain situations apply. One of these is when bitcoin is used to pay for services or goods for personal use, for example, when making bookings at a hotel or purchasing goods at a restaurant.
Another situation where bitcoin is exempt from capital gains tax is when the transaction amounts to less than $10,000. When the cost of bitcoin used in any transaction is greater than $10,000, the personal use exemption does not apply, and instead, the capital gains tax will be in effect. The amount of the capital gains tax will be calculated as the net increase in value of the bitcoin from the time it was acquired up until the time it was used for a purchase.
If you’re involved in the business of purchasing and selling bitcoin for some kind of exchange service, the proceeds earned from bitcoin sales will be automatically included in your total income, liable to taxation. If you incur expenses which are associated with the exchange service, including the purchase of that bitcoin for sale, those expenses will be considered entirely deductible.
When you’re involved in a business associated with the mining of bitcoin, any income you earn from transferring that mined bitcoin to another individual will be included in assessable income. As in the case of buying bitcoin, all expenses you incur as a result of activities related to bitcoin mining will be allowable as deductions from your tax assessment.
Any losses you incur from mining activity may be deducted from your assessable income, assuming certain conditions are met. When bitcoin is held by an individual or a company which is involved with mining and selling bitcoin, it is considered to be trading stock, and this will have to be reconciled at the end of each income year.
If you’re involved with purchasing or selling bitcoin through an exchange service, any proceeds earned from these bitcoin sales must be included in your assessable income. Expenses you incur that are associated with the exchange service, including purchasing the bitcoin for sale, will be considered allowable deductions.
As a general rule, earnings derived from the sale or exchange of bitcoin will be taxable by the government, whereas expenses that you incur in either acquiring the bitcoin, or as a result of your purchasing activities, will be allowable deductions from your assessable income.