Cryptocurrencies experienced a massive leap last year as some recorded massive gains and even achieved new records.
While this is great, there is an expectation that cryptocurrencies will perform even better this year, despite the low performance of the crypto market at the moment.
In this article, I will be talking about the tax advantages of holding crypto, which simply means that you will find out how your crypto will be levied as a tax as a result of your crypto holdings.
• There are some regions where you are not required to pay any form of tax on your crypto holdings.
• Paying taxes on your crypto holdings is dependent on the particular crypto activity you engage in and your taxable income.
• Side incomes gotten as a result of your crypto holdings are considered taxable and are not seen as interest as would be typical for fiat.
• Taxes on crypto holdings vary depending on the region, so you should consult your regional tax officer to know if some of the crypto activities listed in this article are taxable in your region or not.
SEE ALSO: How To Avoid Crypto Taxes (4 Legal Ways)
If you live in a region where you are required to report all forms of crypto activities and transactions for appropriate tax levies, then you might want to particularly pay attention to this article as I will be listing five tax advantages that are incurred by your crypto holdings that you are required by law to pay.
Before I list these tax advantages, I would like to list some activities that are not taxable, so if you do any of them, be rest assured that you have nothing to worry about in terms of taxes.
Here they are…
Crypto activities that are tax-free
1. Buying cryptocurrencies and holding them
Buying cryptocurrencies and holding them alone does not require you to pay any taxes. However, if you try to sell it, you will have to pay capital gains tax on the sale.
2. Donating cryptocurrencies directly to a non-profit organization
Again, you won’t be required to pay any tax if you donate crypto directly to a non-profit organization and you might claim a charitable deduction depending on the particular non-profit organization you donated to. One such organization that could give you a charitable deduction is GiveCrypto.
3. Receiving a Gift
If you do receive crypto as a gift, you won’t be asked to pay any tax unless you try to sell or stake the crypto. Other than these, you are tax-free.
4. Giving a Gift
Giving crypto to someone as a gift is not taxable in any way, as long as you did not sell it to the person.
Although you would have to file a gift tax return in some regions if the amount of crypto being given exceeds a given dollar amount, this too does not mean that you will be taxed.
5. Sending crypto to yourself
Sending crypto between two personal wallets or accounts does not incur tax charges. By transferring between your wallets, you could use that as an opportunity to keep tabs on your potential tax charges if you decide to sell.
Now that you have known the activities that do not require you to pay tax whatsoever, let us head on now to the major points of this article.
Below, I will be showing you the advantages that tax collectors have over your crypto holdings, which means you will be paying taxes for these activities.
Here they are:
Five (5) tax advantages of holding crypto
1. Selling cryptocurrencies for cash
Once you sell your cryptocurrency for cash, you will automatically be required to pay taxes, especially if you made profits from selling them. If you sell at a loss, however, you can subtract the loss from your taxes, which means you will be paying less tax.
2. Spending cryptocurrencies on goods and services
I believe this is a no-brainer here, as spending crypto to buy a car, for instance, means you will be charged a tax for that transaction.
Spending cryptocurrencies is no different from selling them because you will have to sell the crypto first before it is exchanged for a good or service, which means doing so will make it qualify for a capital gains tax.
3. Mining Cryptocurrencies
If you mine cryptocurrencies, you will most likely pay tax on the value of every minted coin that is added to your crypto holdings. If you engage in crypto mining as a business, you will be required to pay a self-employment income tax.
4. Receiving crypto airdrops
Receiving crypto airdrops is no new activity in the world of cryptocurrencies. Airdrops are usually given out to investors as a sort of promotion for the existence of a new coin on the market.
Once you get these airdrops, you will be required to pay taxes as it is seen as income and you will need to state the amount received on your taxes.
5. Earning secondary income from your crypto holdings
If you earn an income as a result of your crypto holdings, you will be required to pay taxes on that income.
You might see this as an interest, but you would be right if you were holding fiat and not crypto because it is considered a tax when cryptocurrencies are involved.
With the above listings, you should now understand the activities that generate tax advantages as a result of your crypto holdings.
Bear in mind that this list is not exhaustive, as other activities will require you to pay taxes should you undertake them.
Frequently Asked Questions (FAQs)
How can I avoid paying taxes on crypto?
If you want to completely avoid paying taxes on crypto, you will have to hold onto your crypto for the long term, move to non-tax regions such as Puerto Rico, etc.
How much tax do I have to pay on crypto?
The amount of tax you have to pay on crypto is determined by your taxable income. As a result, the higher your taxable income, the more likely you are to pay a higher tax percentage, and vice versa.
Crypto tax advantages are something investors tend to avoid as much as they can, but the problem here is that they may not be aware of what activities are taxable and non-taxable and, as such, may unintentionally fall into the trap of one of those activities, which will then require them to pay these taxes.
If you happen to be one of such investors, thankfully, this article is here to guide you so that you know what activities are taxable and those that are non-taxable.
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