Cryptocurrency Taxes: What You Need to Know for 2024

Every known asset in the financial system is subject to tax. And cryptocurrency is no different. There are some regions where crypto is banned or illegal but there are many other regions where crypto is legal and taxed according to available laws. 

Tax laws are quite complicated and are different for many regions. If you're trading in a country where cryptocurrency income is taxed, you should know about which income is taxed and how you can calculate it.

With that said, let's get right into it. 

4 Taxable Cryptocurrency Events and Reporting

There are several events that can trigger tax liabilities. These events are referred to as taxable events in easier terms. Some of the common taxable events that are triggered for cryptocurrency include:

1. Selling Cryptocurrency for Fiat Currency

The first event is triggered when you sell the cryptocurrency you already hold for fiat currency like USD, GBP or whichever is used in your country. Now the difference between the buying price and the selling price is considered a capital gain. If you sold a crypto token at a higher price than you bought it, you need to report it in your income tax. If you fail to do so, you could be breaking a few laws.

2. Trading One Cryptocurrency for Another

Now it’s just just about selling your holding for fiat. Even if you sell your crypto for another or trade it into another, it also triggers a taxable event. The same principle or calculating the gain and loss also applies here. For example if you bought Bitcoin and sold it for another currency like USDT, you need to mention how much you profited from that particular trade.

3. Using Cryptocurrency for Purchases

If you use cryptocurrency to buy any products or services, it is considered a tax liability as well. And as a trader you need to pay taxes based on your profit. For example, if you use an LTC payment method to buy something, the difference between the value of Litecoin when you bought it and its value when you used it for the purchase is a capital gain or loss. There are very few payment methods that offer secure and transparent transactions. This is also one of the with hundreds of positive reviews and one-click purchase feature.

4. Earning Cryptocurrency

Now the last taxable event on this list is if you earn cryptocurrency after completing a service or even as a reward for staking or mining. It is considered as your income and you must report it in your annual tax return. 

How to Calculate Your Gains and Losses

If you want to accurately report your gains and losses in your tax return you need to understand how it is calculated. Let’s find out.

• Determine Your Cost Basis

In simple terms the cost basis is basically the price at which you bought a particular crypto asset. For example if you bought Bitcoin worth $2000 and you paid a transaction fee of $100 then your total cost basis would be $2100. This value is of much importance and you should know exactly how much you spent to buy a token.

• Fair Market Value at the Time of Sale

Now the fair market value is the price of the token when you sold it. For example, you needed fiat currency so you sold $3000 worth of the same amount of Bitcoin that you purchased recently for $2000. The only thing you need to keep in mind here is the $3000 that you made plus the $100 transaction fee you paid for converting your crypto into fiat.

• Calculate Gain or Loss

In this step, you simply have to subtract the cost basis from the fair market value and you’ll have your answer. If the value you got is positive it means you made a significant profit. However, if the value is negative, it will show that you sold your assets at a loss.

Let’s calculate your gain or loss from the above examples. The formula that’s being used is:

Gain or Loss = Cost basis - Fair market value

Gain or Loss = $2100 - $3100 = $1000.

The $1000 is a positive value and it shows that you made $1000 from that particular asset and you are obligated to mention this when you file your taxes for the year.

Short-Term vs. Long-Term Gains

This might sound irrelevant but it’s extremely important. The number of days that you hold a particular cryptocurrency also affects the tax rates. If you hold a crypto asset for less than a year, it is considered as a short-term gain whereas the opposite of it will be considered a long-term gain. Short-term gains are taxed at ordinary income tax rates which are much higher.

For example, if you gain $0 to $47,025 in the long-term meaning over a year, then you won’t have to pay any tax. However, if you earn the same amount in short-term or less than a year, you’ll have to pay around 10% to 12% just in taxes. You can learn more about it here.

Conclusion

Now you know how and when you’ll need to pay tax if you trade cryptocurrencies. There’s no way out of it as it has now been regulated in many countries and is a major form of capital gain for the economy. So don’t forget to file those tax returns with the right calculations. If you don’t know how to file a tax return, you should hire a lawyer or a professional who can help you do it.