In recent years, investors see cryptocurrency as a good and profitable investment. Despite this, most investors do not have an idea of the need to pay taxes when they buy Cardano, how to pay taxes on their gains when they buy Cardano, and what you can do to reduce your short-term capital tax rate. But an investor needs to know these things.
Are you a cryptocurrency investor? Do you buy Cardano? Do you want to know how your earnings are tasked, and how you can gain from cryptocurrency`s short-term capital tax rate? Then keep reading this article because it contains details of what cryptocurrency is, what you need to know about cryptocurrency taxes, and how much tax to pay when you buy Cardano.
What is Cryptocurrency?
Cryptocurrency is simply defined as a type of digital money. It is like the regular money that we are accustomed to such as US Dollars ($) or Euro (€). The difference is that cryptocurrencies do not have physical notes and it is exclusively digital.
The first cryptocurrency introduced to the world in 2008 is called Bitcoin, and it was created by a pseudonymous person named Satoshi Nakamoto. After the launch of bitcoin, other cryptocurrencies such as Cardano, Ethereum, Ripple, Monero, etc., have been launched.
Another important and unique feature of cryptocurrency is its decentralized nature. A decentralized system is not controlled by any central authority such as governments, central banks, or financial institutions, and these are one of the perks of cryptocurrency.
Do you pay tax when you buy or trade Cryptocurrencies?
This question is often asked because cryptocurrencies are known to be a decentralized system, so most investors are curious about paying taxes when they buy Cardano. The answer is YES, you pay tax when you buy or trade Cryptocurrencies in most jurisdictions around the world, including in the US, UK, Canada, Australia. The tax authorities’ tax every cryptocurrency transaction made in these countries.
Every country has its specifics when it comes to taxing cryptocurrency, but the common one in most countries is taxing cryptocurrency as property like stocks. Therefore, if your cryptocurrency appreciates and you make transactions with it such as selling, trading, or using it as means for profit, you are required to pay capital gains.
This also applies if your cryptocurrency depreciates over time, and you make transactions with it such as selling, trading, and you made a loss, the loss will be reduced against other capital gains to reduce your short-term capital taxes.
Therefore, the amount you will be charged for your tax on your cryptocurrency depends on how much capital gain/loss your cryptocurrency acquires over time. Although this rule is also subjected to the specific rules and regulations in your country/jurisdiction. Every investor must be aware of the date, cost basis, sale value, and any fees associated with each transaction made when they buy Cardano.
What is the short-term capital gains tax rate when you buy Cardano?
When you want to buy Cardano, note that any income you earn from mining, staking, airdrops, or getting paid in crypto is always taxed at the ordinary income rate. This applies to every type of cryptocurrency that exists.
If you sold your crypto after holding it for less than one year, the profits, or gains, earned would be subject to the short-term capital gains tax rate. This rate is straightforward: your short-term capital gains tax rate is the same as the ordinary income tax rate, which ranges from 10% – 37%. To calculate your taxes for any short-term capital gains, you would add these gains to your current income, and apply the appropriate tax rate using the standard tax rate table.
How to gain from cryptocurrency short-term capital tax rate through tax-loss harvesting
Over the years, people have been researching how to gain from cryptocurrency short-term capital tax rates because no one likes to be a debtor to tax authorities. A strategy was developed to achieve this, and it is called tax-loss harvesting.
Tax-loss harvesting is used to sell cryptocurrencies while in a position of loss to balance your capital gains, and reduce your short-term capital tax rate on your cryptocurrency gains. This also applies even when you don’t have capital gains to balance. This strategy is also beneficial for your capital loss deduction from your income.
How does tax-loss harvest work?
To understand this, we will use this case study example: Lulu sells a few coins throughout the year at a profit, and she is currently sitting at $10,000 in capital gains. But Lulu also has holdings in crypto at a loss of $5,000. At this point, Lulu unrealized her losses and discovered she could apply the tax-loss harvesting strategy by selling her crypto at the loss. This loss would balance her capital gains by $5,000, therefore reducing her tax liability by half.
It is more important for Cardano investors or traders to leverage this tax-loss harvesting strategy, to lower their short-term capital tax liability, especially, if the proposed capital gains tax hike does come to fruition.