The tax agency, as well as investors, are unsure how to compute gains on cryptocurrencies for taxes purposes, especially since tax laws are in flux and sometimes contradict one another, and tax is calculated on the value claimed by the assessee.
How are gains from crypto assets to be calculated? This is the key question that everyone is asking. By assuming that the first cryptocurrencies purchased would be sold first (first in, first out/FIFO) or that the last cryptocurrencies purchased will be sold first (last in, first out/LIFO)?
Consider an investor who purchased one bitcoin for $1,000 in 2017 and another for $13,000 in 2018. He sold one of his two bitcoins for $7,000 in 2020.
For tax purposes, it’s important to know which cryptocurrency he sold: the one he bought in 2017 or the one he bought in 2018.
The distinction is that if the “FIFO” technique is used, the tax will be imposed to the gains of $6,000 only. According to tax specialists, there will be no taxes if LIFO is used.
“The FIFO technique should be utilised to account for taxation for taxation purposes. However, there is currently no clarity on this, owing to the fact that even the asset class has yet to be defined,” said Amit Maheshwari, a tax partner at tax consulting firm AKM Global.
Gains are always subject to taxation. That is, the sale price minus the cost — but because of the nature of cryptocurrency, determining the cost and gains has become difficult, according to tax specialists.
The fundamental issue with taxation is that no one knows what cryptocurrencies are. That is, whether they are in the form of a money, an asset, a commodity, or something else else. Investors and merchants will be able to avoid taxation until that is specified. Another issue is that tax rates may fluctuate depending on whether you are an investor or a professional trader.
“There is no consensus on how to assess cryptocurrency gains or whether it should be exchanged on a par with capital assets or recognised as a stock in trade by a dealer. “Valuation of crypto is also an issue, particularly on crypto to crypto trades,” said Meyyappan Nagappan, Nishith Desai Associates’ chief of digital tax.