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How Is Crypto Taxed In India
Historically, India’s government had no official stance on the classification and taxation of bitcoin and other cryptocurrencies. By February 2022 we at long last have a clearer, albeit simplistic, tax framework to follow – but it’s not good news for Indian crypto investors.
This was announced in the Budget 2022-2033 speech, where India’s Minister of Finance advised that all cryptocurrencies including NFTs are to be classified as Virtual Digital Assets and taxed as income – not as capital assets.
The key points to note:
- Profit from the transfer of any virtual digital asset is to be taxed at the rate of 30%.
- Profits are seen as income, taxed under section 115. .
- There is no opportunity to treat cryptocurrency as a capital asset.
- Discounted tax on long term versus short term gains is not an option.
- No deduction, except the cost of acquisition, will be allowed while reporting income from the transfer of digital assets.
- A TDS of 1% isto be charged on payments of virtual assets, above a certain threshold .
- Recipients of a crypto gift will be taxed, as if their gift was a form of income.
The proposed 30% income tax is applicable from 1 April 2022 and the TDS of 1% is applicable from 1 July 2022, to be effective from financial year 2022-23 onwards.
Complete Guide To Filing Cryptocurrency Taxes In 2020
While cryptocurrency investing might seem like the next best thing, and it is, there has to be a catch. The catch here is that your earnings arent just yours. You have to pay taxes on them just like in the traditional investment market. This must be done based on each individual trade, and, of course, the price in which each trade was made.
If that sounds tedious, thats because it is. Even worse, if you dont accurately keep track of this information, you can and will be punished for tax fraud.
Fortunately, there are ways to track and file your cryptocurrency purchases and taxes that greatly streamlined the process. In this guide, were going to go over just that.
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What Are Crypto Taxes
The government wants to take a part of your wealth each year. If you own crypto, they want some of that too. Its the early stages of the worlds unstoppable transition to cryptocurrency, and our current tax laws could never have anticipated the situation we find ourselves in. They have become totally unfit for purpose and need to be relegislated. But thats only half the problem.
The US Tax Code is notoriously complex and heres why. Those that pay tax always search for new ways, within the law, to minimize their obligations. Each time a tax loophole is discovered, its patched with more regulation. This is no way to write efficient legislation as can be seen from the size and weight of the US tax code. Title 26 of the U.S. Code has it thinned down to a mere 2,652 pages across two volumes.
Within this outdated, overcomplicated tax code, there are still many ways to avoid overpaying tax on your crypto. Lets take a look at the most obvious ones first.
Capital Gains And Capital Losses Should Be Offset
Balancing capital gains and losses is another approach to decrease the amount of money crypto investors have to pay in taxes. This works by subtracting taxable gains on cryptocurrencies or other investments that have appreciated in value from losses on crypto-assets sold over the course of the year.
You should be aware, however, that this method has limits. When you incur investment losses, you must first offset losses of the same kind. For example, short-term losses lower your short-term earnings, but long-term losses reduce your long-term gains.
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Which States Are Considering Accepting Crypto For Tax Payments
Currently, no states besides Colorado and Ohio have publicly expressed interest in allowing crypto to be used for tax payments. Ohio was set to become the first state to accept crypto in 2018, but the plans fell through. With states such as New York and Florida having their own city coin, it’s likely that other states will eventually adopt practices similar to Colorado’s Digital Token Act.
How To File Taxes On Cryptocurrencies
For investors and businesses, the most essential thing to understand is that they are required to report crypto holdings, gains, and losses to the IRS when filing taxes. If a cryptocurrency return is generated positive or negative or some type of income is realized from holdings, your crypto will need to be reported to the IRS. This is why its important to keep track of any and all crypto transactions.
Here are the basic steps that should be taken when filing taxes on cryptocurrencies.
Determine what, if anything, is owed. If an investor completed a crypto transaction from the list above, it is likely that it generated a tax liability.
Record and report transactions. All cryptocurrency transactions will need to be reported on your tax return. Like with stocks and other investments, the IRS requires this paper trail to ensure an individual reports their full tax liability. Generally, a crypto exchange will provide the transaction history for the investor.
File the correct forms with your tax return. The IRS requires specific forms depending on the activity an individual has conducted with their crypto. That could include making calculations on Form 8949 and then reporting the results on Schedule D of Form 1040 , which outlines and summarizes capital gains or losses.
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Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our investing reporters and editors focus on the points consumers care about most how to get started, the best brokers, types of investment accounts, how to choose investments and more so you can feel confident when investing your money.
The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal.
Sell Assets During A Low
Whether you have short-term or long-term capital gains, your income determines the tax rate you pay. The lower your taxable income is, the lower your tax rate will be. You might save money on taxes by selling cryptocurrency that you know will experience gains in years in which you know youll pay taxes at a lower tax rate.
Selling cryptocurrency might result in some of the income being taxed at a higher rate, but that does not push all of your income into a higher tax bracket as many people believe.
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Example : Capital Gain Or Loss
Tim found a deal on a living room set at an online vendor that accepts Bitcoin. Tim acquired $3,500 worth of Bitcoin to buy the furniture with. By the time he bought the furniture and converted his remaining Bitcoin back into dollars, the value of Tims Bitcoin had increased by $500. The gain realized by Tim was on account of capital, so Tim has to report a $500 capital gain on his income tax return. However, only 50% of that capital gain is taxable.
Purchasing Crypto With Dollars
Simply buying virtual currency with U.S. dollars and keeping it within the exchange where you made the purchase or transferring it to your personal wallet does not mean youll owe taxes on it at the end of the year.
If your only crypto-related activity this year was purchasing a virtual currency with U.S. dollars, you dont have to report that to the IRS, based on guidance listed on your Form 1040 tax return.
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Hard Forks Airdrops And Other Unique Cryptocurrency Cases
While the IRS Bitcoin and IRS cryptocurrency tax rules have been in place since 2014, it wasnt until 2019 that the group said anything about airdrops and hard forks. Fortunately, it doesnt add too much confusion.
It has been classified that hard forks that dont provide airdrops arent necessarily a gross income, meaning that they are not taxable events. However, hard forks with airdrops are another story. These scenarios mean that wealth was created, and traders must pay income tax on the fair market value at the time of the airdrop since an asset with value was essentially created at that time.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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Cashing Out Of Crypto
In keeping with standard tax rules, when cashing out cryptocurrency for fiat money like dollars, one will need to know the basis price of the Bitcoin theyre selling.
For example, if you bought Bitcoin at $6,000 and sold it at $8,000 three months later, you’ll pay a short-term capital gains tax on the $2,000 gained. If the same trade took place over a two-year timeline, long-term capital gains taxes corresponding to ones tax bracket are applied. This is 0% for those in the 10-15% income bracket, 15% for those in the 25-35% income bracket, and 20% for those in higher brackets.
Selling the cryptocurrencies that one has mined instead of those that they bought previously with fiat is a different story. Since theyre receiving dollars in exchange for mining inputs that can only be described as work , the profit made from selling mined cryptocurrencies is taxed as business income. One is also able to deduct the expenses that went into their mining operation, such as PC hardware and electricity.
How To Calculate Gains And Losses
Say you have the following transaction history on Coinbase:
- 1/1/21 – Buy 1 BTC for $29,000
- 2/2/21 – Buy 1 BTC for $36,000
- 3/3/21 – Buy 1 BTC for $50,000
- 4/4/21 – Trade 0.5 BTC for 14.5 ETH
With this transaction history, you first trigger a taxable event when you trade 0.5 BTC for 8 ETH. To calculate the gain/loss, you need to subtract your cost basis of 0.5 BTC from the fair market value at the time of the trade.
The question here is, what is your cost basis in the 0.5 BTC that you traded for 8 ETH? After all, you have purchased 3 different bitcoins all at different prices prior to this trade.
To answer this, you have to determine which bitcoin you are disposing of in this scenario.
To determine the order in which you sell various cryptocurrencies, accountants use specific costing methods like First-In First-Out or Last-In First-Out . The standard method is First-in First-out.
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How Much Is Crypto Taxed
As weâve already touched on, how much the IRS taxes crypto depends on the transaction type and how long you hold onto that crypto.
First, letâs cover short-term capital gains. If you held on to a crypto coin for 12 months or less, the capital gain you realized over that period would be taxed as ordinary income. That means your income tax rate will decide how much tax you pay on the transaction.
If you submit your annual tax return as a single filer in 2022, that means you can expect to pay:
- 10% for any gains of up to $10,275
- 12% for any gains of $10,276 to $41,775
- 22% for any gains of $41,776 to $89,075
- 24% for any gains of $89,076 to $170,050
- 32% for any gains of $170,050 to $215,950
- 35%, for any gains of $215,951 to $539,900
- 37% for any gains of $539,901 or greater
If you and your spouse jointly file your taxes as a married couple, the caps work a bit differently. For the 2022 tax year, joint income tax return rates are:
- 10% for any gains of up to $20,550
- 12% for any gains of $20,551 to $83,550
- 22% for any gains of $83,551 to $178,150
- 24% for any gains of $178,151 to $340,100
- 32% for any gains of $340,101 to $431,900
- 35%, for any gains of $431,901 to $647,850
- 37% for any gains of $647,850 or greater
But thatâs short-term gains weâre talking about here. You also need to consider long-term capital gains tax, which applies to all crypto assets you hold onto for more than a year.
For a single filer in 2021, you should expect to pay a tax rate of:
Invest In Crypto In A Self
Acquiring wealth within an IRA allows us to take advantage of some very generous tax exemptions. As early as 2014, the IRS designated Bitcoin as property, equivalent to stocks and bonds. An IRA is a private version of a 401K retirement savings plan, and anyone with earned income can set one up. They are usually administered through a broker, a bank, or a financial services company.
Theres a tax penalty for withdrawing your savings before the ripe old age of 59½ . For Millennials and Zoomers, this is out of the question. Thats like literally forever away! For GenX, it is the foreseeable future. Its also around the time when crypto should be at its peak. Depending on your age, an IRA could be a great way to reduce your tax burden while you watch your retirement fund head for the moon.
There are limitations, however. In far too simple terms, those under 50 can contribute $6,000 per annum to an IRA. Savers over 50 can invest up to $7,000. This is offset against your income tax, so withdrawing your savings early incurs your ordinary rate of tax. If youre in the cocktail hour stage of your life, its definitely worth investigating.
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When Do You Not Have To Pay Taxes On Crypto
Remember, not everyone who owns crypto will owe taxes this year.
Here’s when you don’t have to pay taxes on cryptocurrency:
Buying and holding
Just buying and holding cryptocurrency isn’t a taxable event. Similar to other capital assets, like stocks, even if the value of the crypto increases, it’s not a taxable event until you sell.
If you transfer your holdings from one crypto wallet to another, you’re not selling anything and it is not a taxable event.
Donating crypto to charity
Charitable contributions are tax deductible. The deduction is generally equal to the fair market value of the crypto at the time you donate it if you held it for more than one year. If you held the cryptocurrency for a year or less when you donate it, your deduction is the lesser of your basis in the crypto or the crypto’s fair market value at the time of your contribution.
Earning Cryptocurrencies Through Mining
Cryptocurrencies are commonly acquired in two ways:
- bought through a cryptocurrency exchange
- earned through mining
Mining involves using specialized computers to solve complicated mathematical problems which confirm cryptocurrency transactions. Miners will include cryptocurrency transactions into blocks, and try to guess a number that will create a valid block. A valid block is accepted by the corresponding cryptocurrencys network and becomes part of a public ledger, known as a blockchain. When a miner successfully creates a valid block, they will receive two payments in a single payment amount. One payment represents the creation of new cryptocurrency on the network and the other payment represents the fees from transactions included in the newly validated block. Those who perform the mining processes are paid in the cryptocurrency that they are validating.
The income tax treatment for cryptocurrency miners is different depending on whether their mining activities are a personal activity or a business activity. This is decided case by case. A hobby is generally undertaken for pleasure, entertainment or enjoyment, rather than for business reasons. But if a hobby is pursued in a sufficiently commercial and businesslike way, it can be considered a business activity and will be taxed as such.
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