Crypto currency is a new financial matter and therefore many things are still being learnt and discovered on how better to run it.
However, just as any financial activities, it has to be taxed inorder to earn income from the different governments.
Despite it being a form of digitalised currency, crypto currencies are taken like capital assets such as stocks and bonds.
This was determined by the 2014 IRS ruling that said cryptos should not be treated like paper money.
The decision though posseses a number of disadvantages to traders of crypto currencies.
This is due to the fact that it exposed them to complex taxes.
For instance taxes are taken off the profits sold off capital assets.
When someone buys items or services and the crypto they used gains value over what they paid, this spending sustains a capital gains tax.
An example can be if a person buys Ugx 200,000 worth of Bitcoins and holds it to rise to a value of Ugx 2,000,000.
Then they buy merchandise worth Ugx 2,000,000 using the Bitcoin, one would then owe Ugx 1,800,000 of the profit realized.
According to Jeff Hoopes an associate professor at the University of North Carolina and a research director at the UNC Tax centre, IRS could have determined to tax cryptos the way they did because of how it’s treated by people.
“I assume the IRS decided this because most people hold crypto as an investment, and we tax the appreciation on capital assets held as an investment.” Hoopes said.
The move could also have been due to practical reasons according to Jon Feldhammer a tax partner at Baker Botts.
“Cryptocurrency started having trading volumes in the tens of millions of dollars each day, and it was clear the IRS was missing out on a significant tax revenue source.” He said.
According to Forbes Advisor on the taxation policy of cryptos, one is only taxed after they make profits.
“You only owe taxes if you spend or sell it and realize a profit. If you sell or spend your crypto at a loss, you don’t owe any taxes on the transaction.”
For instance of one buys bitcoins for Ugx 100,000 and sells them for Ugx 130,000 it’s only the Ugx 30,000 that is classified as tax gain.
And let’s say a person sells the bit coin for Ugx 70,000 then they would owe nothing in taxes.
If a person sells it for Ugx 70,000 the tax gains of Ugx 30,000 can even be used to oversee the losses and do other investment.
The crypto currency tax one owes depends on the yearly income and the duration one has held their crypto currency.
Crypto currency is termed as regular taxable income if it was received through mining, promotion or as payment of goods and services.
The trader will therefore owe the whole value of the crypto currency at the regular income tax rate..
Besides if a person holds crypto currency from the above mentioned procedures and then spend or sell them for a much higher value than when they first received them, they then owe long term or short term capital gains on the accumulated gains basing on the time they held them.
Owing taxes on crypto currency depends on how one got and used them for.
Taxpayers are required to report their crypto transactions on their tax returns.