Cryptocurrency is becoming more popular. From being a niche market a few years ago, it has now become mainstream, with people investing in cryptocurrencies to reap profits from short-term capital gains and buy goods or services.
Cryptocurrency is also subject to capital gains taxes so you should check your tax implications before taking the plunge. Let’s explore whether investing in cryptocurrencies is right for you, as well as some potential ways of taking advantage of that decision.
What is Cryptocurrency?
Cryptocurrency is digital money that is created and exchanged electronically without the involvement of banks or financial institutions. Cryptocurrencies are created and exchanged using a process called mining. They are verified and recorded in a distributed digital ledger known as a blockchain.
How to calculate cryptocurrency taxation
Tax on cryptocurrency profits is calculated based on the exchange rate on the day of the transaction. Since cryptocurrencies come with an inherent risk, your capital gains will be taxed at your regular income tax rates.
While there are no laws regarding cryptocurrency taxation in India, most governments in the world have taken steps to tax cryptocurrencies. There are a few points that can be used as a guideline, for instance, you can expect to pay taxes on your cryptocurrency profits if you hold it for more than one year and trade in it at the exchange rate on the day of the transaction.
Outright trading of cryptocurrency
If you choose to sell your cryptocurrency at the current exchange rate, you will be paying tax on the profits made. This is similar to when you sell stock or any other asset at the current market rate. In this case, you will be paying tax on your profits when you sell the cryptocurrency.
It’s best to take profits when the price is high and hold on to your cryptocurrency when it’s low. This way, you don’t pay taxes on the profits made when selling your cryptocurrency at a later date.
Wrapping up
Cryptocurrency is a highly volatile market. Therefore, it’s not advisable to invest your money in cryptocurrencies and expect to make a profit within a year or two. Instead, it’s best to look at long-term investment. This way, you can plan your finances accordingly and get the best return possible on your investments.
For more information on modern trends on taxation, taxation and cryptocurrency, and tax consultation and planning, contact us today. We are a San Diego CPA firm who specializes in tax-related services to cater to your tax needs.
