What is Capital Gain in Cryptocurrency Tax?

What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax applied to the profit made from the sale or disposal of a capital asset. In the case of cryptocurrency, disposing of the asset could involve selling, trading, or even gifting it, depending on the laws of your country.

• Capital Gains are the profits realized from selling, trading, or gifting a capital asset at a higher price than it was originally purchased for.
• Capital Losses occur when the asset is sold, traded, or gifted at a price lower than its original purchase price.

Essentially, any gain from the disposal of crypto assets is subject to CGT, while losses may offset taxable gains, reducing the overall tax burden. The specific rules for CGT can vary by jurisdiction, so it’s important to consult local tax regulations.

What are capital assets?

A capital asset refers to any valuable item—whether tangible or intangible—that can be converted into cash. These assets are typically acquired with the intention of holding onto them as an investment, with the goal of eventually selling or disposing of them in the future to generate profit.

Types of Assets:

1. Personal Assets: Owned by individuals (e.g., real estate, investments).
2. Business Assets: Owned by businesses, categorized as either fixed or current assets (e.g., equipment, inventory).

Tangible vs. Intangible Assets:

• Intangible Assets: These are non-physical items but still hold significant value. Examples include:
  • Crypto
  • Stocks
  • Licenses
  • Trademarks
  • Patents
  • Copyrights
• Tangible Assets: These are physical items that have value and can be touched. Examples include:
  • Investment property
  • Personal property (e.g., jewelry, collectibles like art, antiques, wine)
  • Office equipment

Both tangible and intangible assets can be subject to Capital Gains Tax upon their disposal, depending on local tax regulations.

What do you pay Capital Gains Tax on?

You’ll be subject to Capital Gains Tax (CGT) on any gain made from the disposal of a capital asset, whether it’s tangible or intangible.

However, capital losses from disposing of an asset are not necessarily a negative outcome. In many cases, you can offset capital losses against capital gains, thereby reducing your overall tax liability. This means that if you sell an asset at a loss, it may help lower the taxes you owe on other profitable sales.

How does Capital Gains Tax work?

To fully understand your Capital Gains Tax (CGT) liability, it’s important to grasp the difference between short-term and long-term capital gains, as they are often taxed at different rates.

Short vs. long-term capital gains

In many jurisdictions, there are different tax rates applied to short-term and long-term capital gains, depending on how long you've held an asset before selling it.

Short-Term Capital Gains:

• Definition: Gains from the sale of assets held for less than one year.
• Tax Rate: Typically taxed at the same rate as your individual Income Tax rate, which could be higher than the rate for long-term gains, depending on your tax bracket.

Long-Term Capital Gains:

• Definition: Gains from the sale of assets held for more than one year.

• Tax Rate: Subject to a much lower tax rate, generally capped at 20% in many countries, although this can vary based on your income level.

  That being said, there are certain exceptions where you might be subject to a higher tax rate on capital gains than the standard 20%.