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How to pay taxes and declare Cryptocurrency profits and losses

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Cryptocurrencies are digital assets that can be bought, sold, exchanged or used to pay for goods and services. Its value fluctuates depending on market supply and demand, which can generate profits or losses for its holders.

If you have operated with Cryptocurrencies in recent years, it is very likely that your country already has a legal framework that indicates the steps or procedures to follow to declare this type of digital asset, since they are considered assets that can generate income subject to taxation.

In this article we explain how to pay taxes and declare gains and losses from Cryptocurrencies in a general way, without going into the specific details of each country, which may vary depending on its tax regulations.

What Cryptocurrency operations must be declared in most countries?

Not all Cryptocurrency operations have the same tax treatment. Depending on the type of operation, they can be classified into:

Transmissions: These are operations in which a Cryptocurrency is sold in exchange for fiat money (Euros, Dollars, etc.), one Cryptocurrency is exchanged for another (exchange) or a Cryptocurrency is donated to another person. These operations generate a capital gain or loss that is calculated by the difference between the acquisition value and the transmission value of the Cryptocurrency. These gains or losses must be declared in the income tax as income from savings or capital, as the case may be, applying the corresponding tax rate according to the legislation of each country.

Performances: These are the income obtained from the use or transfer of Cryptocurrencies, such as interest generated by staking (Blocking Cryptocurrencies in a wallet to receive rewards) or payments received for providing services or selling goods in exchange for Cryptocurrencies. These incomes are considered income from movable capital or economic activities, as the case may be and must be declared in the income tax as general or work income, applying the corresponding tax rate according to the legislation of each country.

Profits and losses without transmission: These are the variations in value that Cryptocurrencies experience without their effective transmission. For example, if you receive a Cryptocurrency as an inheritance or legacy, if you acquire a Cryptocurrency through an airdrop (free distribution) or if you participate in an ICO (Initial Coin Offering). These variations in value also generate a capital gain or loss that is calculated by the difference between the acquisition value and the market value of the Cryptocurrency at the time of the operation. These gains or losses must be declared in the income tax as general or work income, applying the corresponding tax rate according to the legislation of each country.

Tenure: It is the fact of possessing Cryptocurrencies without carrying out any operation with them. In some countries, such as Spain, there is a wealth tax that taxes the set of assets and rights that a person has at the end of the year. Cryptocurrencies are considered economic assets and possession results in the payment of tax whenever it exceeds the exempt minimum established by law. In other countries, such as the United States, this tax does not exist and only operations carried out with Cryptocurrencies have to be declared.

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What is the basic process when declaring my operations with Cryptocurrencies?

The basic process when declaring operations with Cryptocurrencies consists of the following steps:

  1. Identify the operations carried out with Cryptocurrencies during the fiscal year and classify them according to the type of operation: transmission, performance, gain or loss without transmission or holding.
  2. Calculate the capital gains or losses and the returns obtained for each operation, applying the FIFO (First In, First Out) or the established by the legislation of each country. This criterion consists of assigning to each sale or exchange of Cryptocurrency the acquisition value of the first Cryptocurrency that was purchased and so on.
  3. Add all the capital gains and losses and all the returns obtained from Cryptocurrency operations and obtain the net result.
  4. Include the net result in the income tax declaration as savings or capital income, or as general or work income, depending on the type of operation, and apply the corresponding tax rate according to the legislation of each country.
  5. If Cryptocurrencies are owned at the end of the fiscal year and the exempt minimum is exceeded, declare their market value in the wealth tax or in the tax on goods and duties abroad, as the case may be and apply the rate tax that corresponds according to the legislation of each country.
  6. It is important to keep a detailed record of all operations carried out with Cryptocurrencies, as well as keep supporting documents or receipts for them, in order to comply with tax obligations and avoid possible sanctions from the tax authority.

Conclusion

Cryptocurrencies are digital assets that can generate income subject to income tax and other taxes, depending on the type of operation carried out with them. To declare operations with Cryptocurrencies, it is necessary to identify them, calculate the profits or losses and the returns obtained, add them and apply the corresponding tax rate. There may also be an obligation to declare the possession of Cryptocurrencies in the wealth tax or in the tax on assets and duties abroad, depending on the case.

This article is a generalized point of view only and is not intended to be taken as tax or legal advice. The indications given may vary or be completely different from the tax regulations of each country. Therefore, it is recommended to consult with a professional specialized in Crypto assets before carrying out any operation with Cryptocurrencies.

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If you do not declare Cryptocurrency operations, you may incur a tax violation that may result in sanctions from the tax authority of your country. These sanctions may consist of fines, surcharges or late payment interest.

This is because the Crypto ecosystem in its early years was basically a digital monetary resource or niche investment product, meaning that only a small part of the population knew about this digital resource. However, Cryptocurrencies are currently projected as a globally recognized financial option, so much so that many governments are choosing to study the possibility of creating an official Cryptocurrency in their nations.

All documentation proving the completion and amount of Cryptocurrency operations must be kept, such as purchase and sale receipts, bank statements, virtual wallet receipts or certificates issued by exchange platforms.

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