Due to the widespread use of cryptocurrency, crypto day trading is one of the most lucrative businesses in the world. It’s a wonder, then, how it’s still a little-known fact that cryptocurrencies are taxed in most countries. This is because most cryptocurrency holdings are considered “property” or assets like gold and are taxed accordingly.
Simply buying cryptocurrency and holding the crypto by itself does not incur taxes. However, when crypto is used as a form of exchange, it is considered a taxable action. An exchange can sell crypto for real money, exchange it for another type of cryptocurrency, or pay for goods and services with digital currency.
It is recommended that active cryptocurrency traders keep an accurate record of their transactions to track the amount of tax expected on their earnings so as not to violate the law.
Fortunately, not all countries require a tax for trading cryptocurrency. Cyprus is well known for this and is generally hailed as a crypto tax haven due to its lenient laws regarding digital currency trading. But, before explaining why Cyprus is a tax haven, it is essential to understand how the crypto tax works.
How does the crypto tax work?
Over the past two years, cryptocurrency has grown by leaps and bounds and has the potential to grow even more. It is most likely because of this growth that most governments view it as an asset or holding like stocks and bonds.
So, how is crypto taxed?
As stated earlier, buying and holding cryptocurrencies is not a taxable event. However, once crypto is exchanged for money, a product or a service – anything that generates a profit or gain – you will have to pay a certain amount of tax for that profit.
Like stocks and bonds, income generated from crypto trading is taxed differently depending on how you obtained the digital currency and how long you have held it. You pay short-term tax gains if you have owned the crypto for less than a year before trading it. Likewise, if you have owned the crypto for a longer period of time, you will have to pay taxes on the long-term gains.
How do you know if you owe taxes on cryptos?
If your crypto had increased in value from the time you first bought and sold it or otherwise traded it for profit, then you would have taken taxable action with it, and as such you owe it. income tax.
If the value of your crypto increases while you own it and you profit from selling your cryptocurrency for fiat currency, or use your crypto to buy any product or service, and exchange your digital currency for a other type, you need to pay tax on it. To know exactly how much you owe in crypto taxes, you need to figure out how much you originally bought the currency for, then compare that price to the sale price from when you used the crypto.
The difference is your profit and you pay tax for that gain. While it can be easy to track earnings when you sell crypto or use it to buy a product, it can be a problem when it comes to crypto exchanges. Crypto tax software is designed to track your crypto earnings and calculate the tax you’re supposed to pay, and they’re a big help.
Is Cyprus a crypto tax haven?
Not all countries have a crypto transaction tax in place. As an example, Cyprus is generally hailed as a tax haven for crypto traders because until recently there was no legal framework in place for digital currencies, nor is there guidance on how currencies should be recognized or managed.
However, this does not mean that Cyprus is tax-free for crypto. It’s just that, until recently, Cypriot tax laws were more lenient for crypto trading. For example, profits from cryptocurrency trading are not taxed. VAT is also exempt. However, the country still applies a corporate income tax of 12.5%making it one of the lowest rates in the EU.
Although Cyprus is generally considered a crypto tax haven, it is not the only crypto-friendly nation in the world. Many countries have high crypto adoption rates, while the debate over crypto regulation is ongoing and the fine-tuned legislation has not yet been imposed. In many cases, crypto tax is generally lenient where crypto regulations are established.
For example, Switzerland is one of the few countries that does not apply capital gains tax on the sale and trade of cryptocurrencies. Ethereum and Shapeshift are well integrated in the country. Malaysia and Portugal do not impose any capital gains tax or VAT on the sale or trade of cryptocurrencies, so it is a great place for crypto investors. In Singapore, it is almost the same, but if a company’s main activity is trading digital currencies, then it is liable for income tax. Also, Greece imposes a 15% capital gains tax on crypto transactions, which can be mostly considered a low tax compared to other countries.
The massive growth of cryptocurrencies in recent times has compelled most countries to make provisions for their potential and implement policies to control its spread. Taxing crypto transactions is just one of those steps and certainly won’t be the last. It is therefore essential for active crypto traders to keep up to date with new laws that may affect them so as not to break the law.
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