Cryptocurrency is nothing but a digital currency secured by cryptography and block chain technology which makes it difficult to counterfeit it or double spend it. It might a little technical so let’s actually discuss all the terms in detail.
What is cryptography?
Cryptography is derived from the words ‘crypto’ meaning hidden and ‘graphy’ meaning text. It is uses mathematical concepts and other algorithm to convert text into a form or code that only the person to whom the information is sent will understand it. It prevents unauthorized access to information. It is used to protect confidential transactions such as from debit and credit card transactions.
The text converted into code using cryptography is called cypher text and the process is known as encryption. Whereas when the receiver decodes it, is called decryption.
There are basically 3 types of cryptography: –
Symmetric Key cryptography: When only one key is used to encrypt and decrypt the text is known as symmetric key cryptography. Usually Data Encryption Standard (DES) is used to do so because the person receiving the text also should know the key in a secure manner I.e without letting others know. DES is a short key length of 56 bits, which sometimes make it insecure.
Asymmetric key cryptography: Asymmetric key unlike symmetric uses a pair of keys also known as public and private key. Even if everyone knows the public key, the private key is only known by the intended receiver alone.
Hash functions: Hash functions are used to secure passwords. Now hash functions don’t have any key which makes it hard for others to decrypt it.
What is Blockchain technology?
Blockchain is storage of transactions in a ‘block’ in several databases in a ‘chain’. This storage is referred as ‘digital ledger’. No one person or organization is in charge of the entire chain. This blockchain is hosted by millions of processors simultaneously, and its data is available to anyone with access to the internet. What makes blockchain unique is that each block contains a cryptographic hash that links them to the previous transactions creating a compact string of transactions.
As for blockchain, it is not only used for cryptocurrency but also for many other purposes: –
- It Is used for executing contracts
- Distributing important medical information
- Safe transactions of intellectual property
- Ensuring incorruptible voting in elections
So how does this cryptocurrency work?
A cryptocurrency is a medium of exchange which is digital in nature. It is encrypted and decentralized, that is unlike rupees or dollar, there is no central authority maintaining the value of it.
It can further be explained in few steps: –
- First make sure which cryptocurrency you want to buy. As a fact there are more than 1500 types. Some of them are discussed below for reference.
- Then we choose a cryptocurrency exchange. There are hundreds of exchanges outside, but not all exchanges work in all countries. Also, different types of exchanges offer different types of coins, use different methods of payments and may also charge fees. So, choose the one which works the best for you.
- Next step is to create a trading account, for this you need to verify your identity, address, phone number, email address, etc. The exchange will send you a text or an email with a code you’ll use to verify your email address. This code is part of two-factor identification (2FA) and makes your account more secure than simply entering a username and password.
- Next is to choose a method of payment, which is mostly in ‘fiat currency’ like euro and dollar.
- Finally, you place an order for coins you would want to purchase. Now this exchange will work like a stock exchange, where you can buy or sell. You can also buy one type of cryptocurrency in exchange of another.
Note: x sends money to y via a digital crypto wallet but unlike we do it via bank, it happens peer to peer (i.e person to person).
Let’s make it simpler,
There is something known as wallet address, it works like a bank a/c number, which you give to your friends, colleagues, etc to transfer funds. In cryptocurrency, if someone wants to transfer you coins (e.g bitcoin or any other coin), you just simply give your wallet address.
To give you an example of what a Bitcoin address looks like, here is the wallet address that is believed to belong to the creator of Bitcoin, Satoshi Nakamoto!
A cryptocurrency wallet address does not reveal the real-world identity of its owner, which is why the blockchain is referred to as “pseudonymous”.
Let’s discuss some pros and cons before we go to types of cryptocurrencies,
- Cryptocurrency doesn’t use any third party like a bank or a credit card company making transactions easier.
- The fees charged is less compared to what a bank or institution may charge.
- The semi-anonymous nature of cryptocurrency makes it well suited for activities which are illegal.
- More privacy-oriented coins do exist such as Dash, Monero, or ZCash, which are far more difficult to trace unlike bitcoin.
Some types of cryptocurrencies which are active: –
|2009||Bitcoin||BTC, XBT, ₿||Satoshi Nakamoto|
|2011||Litecoin||LTC, Ł||Charlie Lee|
|2012||Peercoin||PPC||Sunny King (Pseudonym)|
|2013||Dogecoin||DOGE, XDG, Ð||Jackson Palmer|
|2013||Primecoin||XPM||Sunny King (Pseudonym)|
|2013||Ripple||XRP||Chris Larsen & Jed McCaleb|
|2014||Auroracoin||AUR||Baldur Odinsson (Pseudonym)|
|2014||Dash||DASH||Evan Duffield & Kyle Hagan|
|2014||Neo||NEO||Da Hongfei & Erik Zhang|
|2014||MazaCoin||MZC||BTC Oyate Initiative|
|2014||Monero||XMR||Monero Core Team|
|2014||Titocin||TIT||Edward Mansfield & Richard Allen|
|2015||Ether or Ethereum||ETH||Vitalik Buterin|
|2015||Tether||USDT||Jan Ludovicus van der Velde|
|2017||Cordano||EDA, ₳||Charles Hoskinson|
There are some inactive coins as well such as Coinye, Bitconnect, Kodakcoin, Petro, OneCoin, etc.
Now let’s study and understand some common scams you should avoid:
- Fake Exchanges: Fake or overnight exchanges are very tricky. So, before you pick you find an exchange to sell coins at a better price, make sure it’s legit.
- Fake wallet: There are many fake wallets out there so be careful.
- Ponzi or pyramid schemes: Named after Charles Ponzi, a pyramid or Ponzi scheme is where someone lurks you in a ‘foolproof’ scheme about how you can just double your money.
- Fund manager: A fund manager is the one that will ask you to handle your account and guarantee you profits within a month. Such managers are a high scam.
- Fake Giveaways: No one is sitting here to make a loss by giving you away something. Make sure you do not get into any sort of giveaway. You will see a lot of ads but just think about what I said.
- Email phishing: In this type, the scammer will most probably send you an infected file via email. And if you are naïve enough to download that file then I am ensuring you that all your data is hacked.
- Scam ICO/ IEO: Initial Coin Offering (ICO)/Initial Exchange Offering (IEO) can also be fake but how do we identify one: –
- Teams (Be sure to check the teams of that project before investing).
- Look for a Viable product (understand the product of their project and see if their product is feasible or not.
- Check over the Whitepaper (Read the whitepaper of those ICOs / IEOs and check how long the project is going to be in the market.)
- Token Matrices (Do check the matrix of that token, what is the algorithm of that token.)
Taxation laws on cryptocurrency:
|Country||Classification||Type of tax||Tax rate|
|Australia||Property||Progressive income tax GST||19-45% 10%|
|Brazil||Asset||Capital gains tax||15%|
|Canada||Asset||Progressive income tax||15-33%|
|China||Virtual commodity||Progressive income tax (for international trading)||3-45%|
|France||Property||Capital gains tax||30-34%|
|Germany||Private money||Progressive income tax||0%-45%|
|India||Digital asset||Progressive income tax GST||0-30% 18%|
|Israel||Digital asset||Progressive income tax VAT||10-50% 17%|
|Japan||Property||Progressive income tax Consumption tax||5-45% 8%|
|Russia||Digital asset||Income tax||13%|
|South Africa||Intangible asset||Progressive income tax||18-45%|
|South Korea||Property||Income tax VAT||20.9% 7%|
|Sweden||Digital asset||Progressive income tax||0-57%|
|Switzerland||Movable property||Progressive wealth tax Progressive income tax||0-0.67% 7-34%|
|Turkey||Commodity||Progressive income tax||15-35%|
|UK||Private money or Asset||Corporation tax Progressive income tax||19% 0-45%|
|USA||Property||Capital gains Progressive income tax||0-20% 10-37%|
Regulations in Germany:
Cryptocurrency is not treated as means of payment in Germany. Rather it is treated as a foreign money.
Bitcoin is also not an investment, such as stocks, that are subject to a 25% withholding tax if sold at a profit.
Bitcoin trading is considered as a private sale activity, which means that any profits are taxable under §23 EStG. However, if there’s a holding period of 1 year before sale, the profits are usually tax free.
Taxation of cryptocurrencies in France
Capital gains realized from 1 January 2019 will be taxed at a single rate of 30%, including social security contributions.
The 2019 Finance Act defines surplus value, which roughly corresponds to the following calculation: transfer price – purchase price – possible depreciation. For example, a sale price of €10,000, a purchase price of €4,000 and no capital loss equals a capital gain of €6,000, which makes it €1,800 in taxes.
There are two exceptions to this rate. A tax exemption is given on capital gains of less than or equal to €305, but the state, nevertheless, requires a declaration. The rate is increased to 33 or 34% if a taxpayer receives an exceptional high-income contribution (CEHR). An increased rate is applicable for a taxable income of over €250,000 for an individual.
Earnings corresponding to a usual activity used to be taxable in the category of industrial and commercial profits (BIC), while those corresponding to an occasional activity were reported as non-commercial profits (NBC). Mining is currently taxed as a non-commercial profit (NBC).
The crypto community has requested specific tax measures regarding mining, as well as the eligibility of Blockchain projects, namely that they should have the status of “young innovative enterprise” (JEI) and the benefit of CIR (credit of research tax). These are included in the next draft budget law.
Cryptocurrency Taxes in the Dutch
The tax authorities see bitcoins, or other cryptocurrencies that you own, as assets. You must, therefore, pay tax on the total value of all cryptocurrencies that you own. The capital from cryptocurrency falls under “other equity” in box 3, which is about saving and investing. The tax to be paid is calculated per bracket, based on a notional return on which you, again, ultimately pay 30% tax.
Cryptocurrency Tax Liabilities in Sweden
You are taxed for the entire profit at a rate of 30%. If you have made a loss, it is deductible by 70%.
If you have received bitcoin as a payment on a one-time basis, the expense amount is the value that you report as turnover, including any VAT.
If you have received bitcoin as a salary for work in employment, the expense amount is the value that you report as income from service. There are four tiers for income tax, depending on the income.
|0%||0 kronor to 18,800 kronor|
|Circa 32% (ca. 11% county and 20% municipality tax)||18,800 kronor to 468,700 kronor|
|32% + 20%||468,700 kronor to 675,700 kronor|
|32% + 25%||675,700 kronor|
Cryptocurrency Taxes – Switzerland
Cryptocurrencies are inherently recognizable and identifiable. As such, they must be treated as assessable movable property, like cash. Cryptocurrency ownership is subject to wealth tax and must be reported in the statement of securities. The rate at which the tax must be imposed is not clearly defined. Cryptocurrencies which are not yet on the Swiss Federal Tax Administration rate list and don’t have a clear way to determine the price must be declared at the buying price. This may need to be done because of the absence of transactions made in this cryptocurrency.
Profits or losses resulting from transactions with cryptocurrencies are non-taxable capital gains or non-deductible losses. However, when a person uses cryptocurrencies in a professional setting (e.g., persons specialized in professional trading), the profits earned are taxable in the form of independent income, when appropriate; losses can be made an object of a tax deduction.
Crypto Taxes in the United States
When it comes to tax legislation, cryptocurrency is considered as property; profits, in this case, are derived from capital gains and not from exchange differences.
Federal income tax ranges from 15 to 35%, depending on the size of net profit; the state tax is 0 to 10%, depending on the state of registration. The amount of federal tax will depend directly on the net profit (PE), which is calculated by the formula: PE = Revenues – Costs.
Short-term capital gains are taxed as ordinary income as stated by the law, whereas long-term capital gains are taxed in the three brackets of 0%, 15%, and 20%.
In the US, sales tax ranges from 0 to 8%, depending on the specific state but excluding city and local taxes.
Taxes on cryptocurrencies in Canada
According to Raymond Chabot Grant Thornton (RCGT), any profit realized at the time of the disposition or exchange of a virtual currency may result in a taxable income or gain and, if applicable, must be included in the tax return. Regardless of the transaction, the rules persist: all transactions (exchanges, transfers, etc.) must be reported as dispositions and distributions for tax purposes (numbers are rounded up):
15% on the first $45,000 of taxable income, plus
20.5% on the next $45,000 of taxable income, plus
26% on the next $50,000, plus
29% on the next $60,000 of taxable income, plus
33% of taxable income over $200,000
Taxation on crypto in Brazil
Gains from the disposal of assets with a total of more than R$35000 are taxed as a capital gain at the initial rate of 15% (up to R$5 million). Digital currencies (such as Bitcoin) should be declared in the Assets and Rights tab as other assets as they are considered a financial asset.
How cryptocurrencies are taxed in Australia
The ATO perceives cryptocurrencies as property; therefore, a similar logic applies as to the regulation of real estate investment or shares. A tax is levied on the profit obtained from an investment and has to be declared every year. The country has a system for identifying suspicious activities in which unusual transactions higher than $10,000 AUD have occurred. A relevant observation is that those people whose funds are worth less than $10,000 AUD are exempt from declaring taxes because in this case it is considered that cryptocurrencies are for personal and recreational use.
How to report cryptocurrency on taxes in Japan
|Gross income amount||Tax rate|
|More than 200,000 yen 1.95 million yen or less||5%|
|More than 1,950,000 yen and less than 3,300,000 yen||10%|
|More than 3,300,000 yen 6.95,000 yen or less||20%|
|Over 6.95 million yen and under 9 million yen||23%|
|Over 9 million yen and under 18 million yen||33%|
|Over 18 million yen and under 40 million yen||40%|
|Over 40 million yen||45%|
(Inhabitant tax of 10% is added further.)
Tax laws on cryptocurrency in China
The People’s Bank of China published a statement warning citizens to avoid the possible risks of ICOs and enforcing rigorous procedures regarding transactions with cryptocurrencies, explicitly banning cryptocurrency exchanges and ICOs within the country.
Crypto taxation in Hong Kong
There is no capital gains tax for cryptocurrency investments, but there is income tax for profits derived. Therefore, you have to file crypto taxes as part of your income in Hong Kong.
How to pay taxes on cryptocurrency in South Korea
It remains vague and disputed
How to report cryptocurrency on taxes in India
The Indian authorities started levying an 18% tax on goods and services in cryptocurrency operations. Although it was banned in 2018, there was an appeal in supreme court to legalize cryptocurrency.
For more information, do read the article on: –https://3commas.io/blog/cryptocurrency-taxes-guide/embed#?secret=vlE4iuk42G
Thanks for your time and have a good day!