In our later post, we have already discussed how different a crypto asset is from a regular physical asset, its unique characteristics and wide range of services makes it a spectacular choice for investment. But do you know that some taxes are exercised over the crypto asset? People may have thought that it is just an online transaction medium! How one can put taxes over them, but one thing we have to remember is that everything that yields the profit margin can be put under the taxation policy. You may visit BitBolt to learn more about cryptocurrencies.
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Characteristics of Cryptocurrencies that makes it legal to imply tax
Cryptocurrencies are decentralized medium so therefore no autocracy can be established over their regulation the following complications arises over the controlling of the cryptocurrencies:
- Lack of authority
- Value determination is difficult
- Rapid growth of investment
- Anonymity of transaction
- Large Market capitalization
As we can see that there are lots of factors that contribute towards the taxation policy of this virtual asset, now we will be seeing the way taxation policies are applied to Cryptocurrencies.
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Implications of Taxation policy over virtual asset
Here we will be exploring the different ways of tax treatment that are applied over the cryptocurrencies based on their mode of creation and different conditions that occurred during their complete lifecycle of transactions made.
Also, the tax treatment in different countries of the world has different challenges to be applied correctly because new kinds of transaction policies and protocols are regularly updating in the crypto market.
Which makes it difficult to imply and follow the jurisdiction of that particular country.
Now, here we have divided the tax implication into the following sub-section, which would be easy to understand and better to know simply.
- Generation of new virtual coins
The mode of creation of a cryptocurrency matters a lot for the application of tax, the policymakers pay keen attention to the way through which the new cryptocurrencies have been generated.
Here we can list the three possible ways of generating a cryptocurrency:
- Through crypto mining
- Airdrop method
- ICOs token generation.
We all know that out of these three we are only familiar with the crypto mining process, where the successful miners are rewarded with the crypto coins, and this sparks an interest in policymakers, who give large value for the implication of tax over a mining event. The tax that is applied over a mined currency is higher than the rest of the two methods because it is a highly popular and consistent event with greater market value.
- Exchanges made through virtual currencies
Another important factor for the tax treatment of the cryptocurrencies, here a person is made to pay tax based on the exchange medium he used for the disposal of the cryptocurrencies.
According to the policymakers the below events of disposal methods are eligible for a tax treatment over the crypto-asset;
- Exchanging the cryptocurrency with the other form of cryptocurrency
Ex: Exchanging Bitcoin with Dogecoin.
- Exchanging the cryptocurrency with a fiat currency
- Exchanging the cryptocurrency in the form of payment method for buying goods and services.
- Based on Ownership
It is the third important basis of the tax treatment of crypto-asset where the tax is paid by the individuals due to the following conditions:
- If the individual has a business or any occupation which revolves around cryptocurrency’s transactions.
- If there is a group of investors which is trading along with the cryptocurrencies then the tax rate to be paid is higher.
- If any person is using the cryptocurrencies as a form of investment or liquid contract
- If a person makes a profit by trading via cryptocurrencies.
- Tax has to be paid if the sale of cryptocurrencies is happening in the form of business assets.
Tax policies may differ from country to country according to their set of constitutions and the law they are following to control their financial market.
Some of them may levy the taxes for particular reasons but some of them may charge taxes according to the nature of trading of cryptocurrencies.