Capital Gains Tax (CGT) is a levy imposed by governmental authorities on the profit realized from the sale of a non-inventory asset, which includes cryptocurrencies. This tax applies when a digital asset is sold for a price higher than its purchase price, constituting a capital gain. The purpose is to collect revenue from wealth appreciation, not just income.
Mechanism
The operational mechanism for CGT in crypto involves tracking the acquisition cost (cost basis) and the selling price of each disposed asset. The difference between these two values determines the capital gain or loss. Tax jurisdictions typically classify gains as either short-term (assets held for a shorter period, e.g., one year or less) or long-term, with differing tax rates applied based on the holding period and the taxpayer’s income bracket.
Methodology
Individuals and institutions involved in crypto investing must meticulously record all transaction details, including purchase dates, acquisition costs, sale dates, and sale proceeds. Accounting software or specialized crypto tax platforms aid in this data aggregation and calculation. The methodology for compliance requires accurate record-keeping to determine tax liabilities, potentially employing strategies like tax-loss harvesting to offset gains by realizing losses, thereby optimizing tax obligations.
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