Bitcoin taxation

What is a Bitcoin?

An instance of a cryptocurrency is a digital amount that can serve as a medium for exchange wherein individual coin ownership records are stored in a computerized database with the help of strong cryptography in order to secure and monitor transactions as well as verify ownership transfers.

In simple terms, it is a decentralized digital currency that promotes highly secure global transactions. Now the most likely and obvious question, “where does it get stored/ managed?” Every individual is provided an online wallet that is divided as

a) hot wallet or online wallet
b) multi-signature wallet (one that requires more than one key to carry out transactions)
c) cold wallet or offline wallet. Bitcoin is one such cryptocurrency and it can be stored in one of the wallets of preference and the transactions are perfectly recorded in a public list referred to as the blockchain. But bitcoins in India do not hold a legal tender status under the RBI, yet.

What is the role of taxes on cryptocurrencies?

Like any other currency, these digital currencies are also subjected to taxation but, it is found to be followed under some distinctive conditions. The predominant factors adhering to the taxation process are the holding period and disposition of the currencies. If these currencies are traded off in less than a year, they are taxed at the rate of short-term capital gains tax. Whereas, if they are disposed of after holding them for longer than a year, its taxation rate constitutes that of long-term capital gains. You can also find different websites on the internet to determine the type of asset you are holding and thereby, its tax rate. Apart from trading, bitcoin mining is a process of creating new cryptocurrencies by solving computational puzzles. It requires heavy competitive mining computers and takes up to 4-5 days, approximately. These miners are paid through bitcoins and this form of their income again becomes taxable.

When are bitcoins taxed?

• On selling the bitcoins personally mined to a third party.
• Anticipating a price drop and selling of the bitcoins bought from someone to a third party.
• Trading the bitcoins mined for personal benefits such as buying goods or services.
• Trading the bitcoins bought from someone for quenching one’s needs through the acquisition of goods or services.

Despite the conditions mentioned above, the volatility of these cryptocurrencies makes it extremely difficult to analyze, determine and maintain a definite value for the same. This in turn affects the taxability of the everchanging money values of the digital currency.

Make sure to keep a solid and clean record of the time of acquisition and disposal of the cryptocurrencies you own. One way to ease up this exhaustive process is by aggregating all the records that essentially constitute the buys, sells, conversions, exchanges, airdrops, and mined coins into one single and a collective unit. With an intelligible and lucid transaction history, one can maneuver through the crypto world without any technical predicaments.

What happens when you evade taxes on cryptocurrencies?

Cryptocurrency draws a line of similarity with the already existing sources of income in one main aspect which is, taxation. When the Internal Revenue Service (IRS) takes notice of your unpaid taxes, they initially alert the individual by sending out a fair warning notice. If the individual continues to neglect the payment of taxes, they are imposed with respective penalties. An interest rate varying from 0.5% to 20% shall be imposed on the amount of tax the person owes to the body.

What is a Bitcoin tax calculator and how does it work?

Depending on the holding period of Bitcoins, the type of capital gains tax is determined using the utility tool named Bitcoin tax calculator. The way to operate this tool is by entering the purchase and the sale price of the Bitcoin along with the holding period. This helps you get a clear picture and an understanding of the amount of tax you owe to the Reserve Bank India.

Insight into Initial Coin Offerings (ICO)

ICO is a method sanctioned to raise adequate funds for the development of new types of cryptocurrencies. Interested investors can take up on the offerings laid down and acquire new cryptocurrencies. This procedure is done by creating a whitepaper that briefs about what the project is about and the promises the project owes to fulfill on its timely completion. The tokens for the project are either bought through fiat money or digital currencies.

Some concerning factors of cryptocurrencies

Since bitcoins are decentralized and not regulated by any autonomous management, they hold a few risks. Bitcoins are highly volatile and when these currencies are not supervised by-laws and strict regulations, it provides opportunities for illicit transactions to take place. The anonymity of an identifying owner in the crypto world is also a crucial reason for any kind of illegitimate transaction.

Conclusion

The future of bitcoin is highly undetermined and open to question. But, the good chance of taking necessary risks and threading through the process with caution resulting in unforeseen gains cannot be denied. Our world is bombarded with new innovations every day and these are to be explored with a proper understanding of its functionality. The effective utilization of these digital currencies can bring about enormous change and help us stride towards a more digitalized and smarter lifestyle.