Hey guys,
I’m pretty new to investing in bitcoin and I’m trying to wrap my head around the tax stuff. So, as far as I get it, if I’m just buying and selling on exchanges, my gains and losses are treated like regular capital gains or losses. Like, if I buy $1000 worth of bitcoin in January and sell it for $2000 in March, that means I have $1000 in short term gains. That part seems straightforward enough.
But what about when I actually use bitcoin to purchase something? It kinda sounds like I’d need to check the price that day and figure out my gain or loss every time I buy something. That seems super impractical unless it’s a big purchase every now and then. If we really want to see bitcoin used as actual currency, how is that gonna work? Am I missing something here?
Appreciate any insights!
This probanly depends where you are as there are often limits on declaring tax so you don't declare something too small (unless the tax system can handle it well).
It's also possible to just do the accountancy for tax purposes at the end of the year and just save the amounts you use to buy things with to work out what your realised gains and losses were.
Anybody please correct me if I'm wrong, but the moment you use your Bitcoin as payment for goods and services, it's as if you are already converting it. Therefore, it is taxable. Let's say you bought or received your Bitcoin when its price was $5,000 and then you made a payment with it for certain goods and services when its price was already at $10,000, there's a $5,000 that needs to be taxed.
This might help you:
https://time.com/nextadvisor/investing/cryptocurrency/cryptocurrency-tax-guide/
Please note that this is US-based. Taxation highly varies from one country to another. But yes, it is indeed a hassle to do some reconciliation of Bitcoin's cost when it was acquired and its value when it was spent every time you make a purchase with it.
Well, As it happens, only a small part of bitcoin transactions are related to merchant processing. However, eventually you may see widespread merchant adoption, and that will have implications for tax reporting. Currently, users who use bitcoin for purchases can easily calculate the profit and loss at the time of buying and selling. But when there is widespread merchant adoption, you need to track your income and expenses i.e. at the time the transactions are made.
What you are talking about is a long-debated problem. If you lived in El Salvador, since it is legal tender there, you would not have to pay taxes for using it, regardless of price fluctuations with respect to the USD or other currencies.
In the case of most countries, as you mention, simply paying for a coffee in theory creates a taxable event, which makes it very difficult for people to spend it as a currency on a daily basis. At some point it was discussed in the USA to set a threshold below which Bitcoin transactions would not have to be declared, such as $200, but as far as I know there is no law passed on this.
Thus, it is, at least in the vast majority of countries, where Bitcoin transactions are taxed with capital gains tax.
Generally for other assets it goes like this only. You see the fair market value of the asset the day you are relinquishing it in exchange of something else and this fair market value becomes your sell price or purchase cost and accordingly you calculate your taxes on this value itself. But this is in practice because it is clearly written in law, about Bitcoins it isn't written in law so far therefore one cannot just assume that we have to follow this methodology but based on similar scenario this is only the best way we currently have to calculate this.
Probably not the case in the vast majority of countries. But this is definitely the case in countries where tax laws, policies, and appropriate forms are regularly updated and implementation is strict. From where I'm writing though, not only are the tax laws archaic and partially blind to emerging technologies, they're also poorly implemented. Anybody could buy and sell Bitcoin, pay it for goods and services, without paying a centavo of tax--save perhaps to the tax already included in the prices of goods and services--and no agency would run after you.
Apart from profits even transacting has been coming under taxation in some countries even though it's not really possible to identify the p2p transactions but when users withdraw crypto from exchanges can be taxed and it depends on the country where your are residing in. In your theory yes you need to keep the records and has to be reported for tax compliance on most cases.
I do believe that it is so in most countries at least, because what happens is that in those countries that do not have an explicit, specific regulation for Bitcoin, is that if you buy something for 100 and sell it for 200 you get charged capital gains tax (I am ignoring minimum exemptions here for simplicity of argument). So even if they do not have a specific law for such assets, what is clear is that when you obtain a capital gain and make profits, your country is going to charge you, because capital gains already apply to a variety of things, such as stocks, funds, bonds, precious metals or real estate, so from a legal point of view it is easy to treat Bitcoin and cryptocurrencies in the same way.
There are almost 200 countries all over the world. Probably half, or more, of them don't have tax laws pertaining to Bitcoin or crypto, which basically means Bitcoin is outside their radar. Bitcoin is therefore unclassified. And even among countries where tax laws are updated, there are some where Bitcoin is more or less tax free. And in some countries where Bitcoin is taxed, capital gains and even income tax are not imposed.
"While most countries around the world tax subject crypto to Capital Gains Tax or Income Tax - there are still a few crypto tax havens and countries where you'll pay less crypto tax."
Source: Top 10 Crypto Tax Free Countries 2022
It has been explained to you before that although there is no explicit regulation for Bitcoin, capital gains tax can be applied to it because it applies to what you sell for more money than you buy, without the need for a specific law.
In any case, if you argue that there are many countries where no tax or capital gains tax is charged, I would appreciate it if you could provide a source,
I'm not sure if the article indeed has basis in using the term most. Perhaps among the countries where Bitcoin is already recognized by way of policies and laws, most of them impose capital gains on Bitcoin.
Not necessarily. There might not be a need for a specific law for it, but if Bitcoin is not even categorized, how should it be taxed? Is it by default that since it is not classified, it should immediately be listed as a capital asset? What if I don't even treat it as an asset? Or what if I reason that I am keeping my Bitcoin for a while and then sell it when the price is high and buy back when the price goes down and then sell again when it recovers and so capital gains tax doesn't apply to me? In which case, I am only responsible to pay value-added tax but since I am not reaching the amount limit set by law then I am not obliged to pay any tax at all? Is that legally valid enough?
My point is that for as long as there's ambiguity as to how Bitcoin is classified or regulated, interpretations are open. And if interpretations are allowed, how can I be obliged to pay a certain form of tax which assumes Bitcoin's classification?
I did not say many; I said some. Your source proves it.
In the same way that if you sell me a rock you find in the mountains for $10k and I sell it to someone else for $20k, I have to pay capital gains tax on that $10k profit, and I don't think there is any law that explicitly regulates the rocks you find in the mountains.
It may vary somewhat in some countries but it applies to any object that you sell for a higher price than the purchase price, without having modified it, because if you work on it or modify it, VAT would apply.
In any country you are required to pay income tax. Even if you don't have tax laws on cryptocurrencies, like in my country Russia, you have to pay taxes on the received fiat.
And here many questions arise: you bought bitcoin for 60,000 thousand dollars and sold it for 20,000 dollars, but you do not have documents, or your tax office does not accept documents from a foreign exchange.
If bitcoin is prohibited for you as a means of payment, then you will sell it on the exchange and use this price in your tax return.
I advise everyone to separate investments from purchases if you do not want to spend time collecting documents for each transaction.
As far as I know, the taxation scheme applied by each country is different, of course all of that is based on the policies that have been determined by the tax authorities regarding crypto in each country, there are several countries that have set it as income based on the final transaction, if in my country it is called VAT and PPh.
As I know, it doesn't matter if you manually select items with different prices, when you pay with Cryptocurrencies your shopping will be in the final total, example: your spend is $1000, if you pay with crypto/Bitcoin the total is $1000, including VAT and PPh, of course each country has a different crypto tax rate.
What is certain is that your country also has different laws regarding taxation of crypto.