In recent news, the Biden government is reported to have begun investigating the energy use and carbon emissions of bitcoin mining activities. The government’s policy choices on the exciting new realm of cryptocurrencies will be guided by the findings of this research.
Let us take a closer look at how to calculate crypto taxes with new environmentally conscious policies coming up.
Bitcoin has gained public acceptance after more than a decade. Cryptocurrencies have mostly evolved into speculative assets, a kind of digital gold, attracting speculators who think they will be ready to sell their shares for significant gains in the future, rather than serving as a means of everyday transaction.
However, there is a drawback to the virtual gold rush: excessive power use.
Cryptocurrency & Energy Consumption
Most of us ask the common question: “how to calculate crypto taxes?” since many only buy pre-mined tokens on exchanges. Thus, average cryptocurrency buyers might not be aware of how much energy bitcoin procedures consume. However, cryptocurrency consumes a colossal amount of energy. According to estimates, bitcoin mining consumes more energy overall year than Argentina as a whole and produces 65 megatons of CO2 in the same period of time.
It is now clear why the authorities would want to look into cryptocurrency’s energy usage and footprints and find a means to lessen them. We must consider how many other cryptocurrency networks are out there, using energy alongside large networks like Bitcoin and Ethereum.
Although the environmental impact of cryptocurrencies isn’t specific to Bitcoin, its widespread use and particularly ineffective consensus method make it an easy target. The underlying blockchain technology, however, may hold the secret to a more environmentally friendly future.
New Government Policies
The U.S. government is only just beginning to understand the rapidly developing concept of virtual money and blockchain technology, however some preliminary concepts for reducing bitcoin energy use center on the staking structures that several networks employ to assure user loyalty. Both of the most common staking methods have benefits, with the proof-of-stake model using less power and the proof-of-work approach being more reliable all-around.
The administration may issue a policy forcing blockchain networks to use this model going forward as a result of blockchain networks like Ethereum switching to the proof-of-stake model to save energy.
How to Calculate Crypto Taxes in This Scenario
Now coming to the most important question: how to calculate crypto taxes if the administration comes up with new crypto policies?
If there is a gradual shift to the proof-of-stake model, blockchain systems that are unwilling to comply with this requirement may decide to relocate to a different nation where such restrictions on their activities do not exist. Consequently, the taxability of cryptocurrency will depend on the regulations set by the country’s authorities.
Apart from the environmental effect, power prices reduce the profitability of bitcoin mining. However, it may improve the likelihood that blockchains will become widely used by improving the efficiency of producing digital currency.
The carbon footprint of many organizations might be reduced by incorporating blockchain technology into every aspect of economic activity.
The White House may announce a policy that favors the proof-of-stake model in its place if the government determines that the proof-of-work model consumes too much energy. Even while this would cut down on energy use, certain blockchains might not be prepared to compromise on security.
Any new guidelines the White House issues on this emerging industry are expected to have an impact on the crypto market, but their full consequences have not yet been determined.
How much tax do you pay with crypto?
The IRS classifies cryptocurrencies as assets, similar to stocks, rather than conventional money (like USD, Euro, or Yen). This implies that depending on how long you’ve held your crypto assets you’ll be subjected to long-term (0% to 20%) or short-term (10% to 37%) capital gains tax on your crypto gains. Additionally, if you carry out events where you receive crypto as income, you will have to file them as income taxes.
How is crypto tax calculated in the US?
In the United States, cryptocurrency gains are subject to tax liability, regulated by the Internal Revenue Service (IRS). IRS had issued a Notice 2014-21 which stated that you must notify the IRS of any capital profits and losses if you sell or exchange cryptocurrency. The difference in price between the purchase and sale prices of your cryptocurrency is known as a capital gain.
Do I need to report crypto if I didn’t sell it?
If you simply purchased crypto and didn’t sell or cash it, you do not need to report it on your tax form.