Over 221 million cryptocurrency users were registered on different trading platforms and apps in 2021, representing a substantial rise from previous years.
According to Crypto.com, cryptocurrency adoption surged to unprecedented heights between February and May 2021, as crypto markets added over 100 million new users within that time frame. At the initial publication of the research ‘Measuring Global Crypto Users’ in May 2020, 66 million cryptocurrency users were registered.
Decentralized Finance (DeFi), along with a rise in crypto banking use cases, has accelerated adoption in the second half of 2021, partly due to rising inflation risk, a weaker US currency, and the potential for higher inflation, among other reasons. Bitcoin’s (BTC) presence on corporate balance sheets and its adoption by FinTech firms all contributed to the cryptocurrency’s growth in popularity.
In the first half of 2021, bitcoin adoption grew dramatically, with the number of cryptocurrency owners more than doubling from 100 million in January to 221 million by June. Cryptocurrency users increased from 65 million in May of 2020 to 100 million over the course of nine months.
The global market for this sector is expanding rapidly, with recent discoveries of widespread usage in the United Kingdom, Nigeria, Australia, Canada, Mexico, Canada, China, and India, among other nations. Additionally, institutional investors seem to be growing interest in bitcoin, raising the potential to be used as a hedge against global quantitative easing.
As the market has expanded, central banks, regulators, and political decision-makers have all responded favorably. Officials at the United States Federal Reserve debate the feasibility of creating a crypto-dollar linked to its real-world counterpart.
The United Kingdom’s Financial Conduct Authority is considering the feasibility of creating a centralized regulatory framework for cryptocurrencies. In European countries such as Germany and France, a similar situation exists.
The financial industry has been particularly sluggish to react. Despite a cryptocurrency economy that requires banking services, several financial services associated with wealth storage and distribution do not exist.
Consequently, the question arises, what exactly is crypto banking, and how is it affecting the banking industry today? Is it possible to tax cryptocurrency banking? We will go into more detail about this topic to find the answers to all of these questions and many others.
Understanding Crypto Banking
To date, there are several different approaches to banking with cryptocurrency. Investing in cryptocurrencies is becoming more appealing because people see it as a way of interacting with them in the future. Trading platforms may be utilized in order to purchase and sell digital currencies. Conventional banking on the other hand is simply managing cash and credit by having checking and savings accounts and loan transactions administered by banks.
A company that deals with digital money can be referred to as a crypto bank. Additionally, cryptocurrency financial services may be made available and other financial services to enable users to keep a balance, make payments, and get interest. Several financial organizations have started incorporating cryptocurrency offers onto their platforms.
On financial-market-related forums and websites, you often find discussions about blockchain, artificial intelligence, and cryptocurrency. Due to the growth of the crypto sector, we are witnessing an enormous change nowadays, as the number of transactions is increasing daily.
The growth rate for crypto currency banking by 2024 is expected to be 12 percentage points more than it is now. It started to be questioned whether traditional banking would continue to exist, and if so, would it matter? The introduction of cryptocurrencies will enable it to promote itself as a currency that will have a more prominent role in our lives. Moreover, there are technological challenges for instance conventional banks have the challenge of transaction speeds being considerably slower than those of crypto banks.
Listed below is a list of finance-related products and services currently available through crypto banking:
- Crypto based Interest Accounts
- Crypto based Credit Cards
- Crypto-Backed Loans
Getting Started with Crypto Banking
For starters you must first acquire some cryptocurrency before you can engage in cryptocurrency banking. To carry out this assignment, you will require a crypto wallet since blockchain technology makes the usage of a crypto wallet mandatory.
While the vast majority of cryptocurrency wallets aren’t used to keep money, they serve an essential function in that they act as a portal for another asset. They retain passwords because they want to be able to access their cryptocurrency. When you buy cryptocurrencies, most businesses will offer you a free bitcoin wallet.
Once you’ve chosen the company or organization to host your wallet, you will be able to purchase cryptocurrency. The first step is to convert your money into cryptocurrency by utilizing this method. You may safely store your crypto money by putting it in a cryptocurrency exchange/bank/wallet.
Tax on Crypto Banking
When you engage in crypto banking, you engage in a variety of transactions, which is where the taxes come into play. It is a widely held misunderstanding that since bitcoin is not backed by any government, it is subject to less regulation than fiat currencies such as the dollar and euro. Numerous cryptocurrency investors think that the absence of regulatory supervision has resulted in elusive and anonymous transactions that enable them to avoid paying taxes. This, however, is not the case. For instance, the Internal Revenue Service (IRS) mandates cryptocurrency exchanges in the United States to record user activity on profits and losses, and crypto is taxed similarly to conventional equities.
For federal income tax purposes, cryptocurrency is considered “property,” which means that the IRS views it as an asset. This essentially implies that you pay cryptocurrency taxes in the same manner that you would pay capital gains or loss taxes.
The cost of a capital asset determines its value, whether it be a stock, bond, exchange-traded fund, home, or Bitcoin. The net sales proceeds from the capital asset’s sale are compared to the initial basis to determine if there was a capital gain or loss. Gains on capital transactions are calculated as the excess of total receipts over the original cost base. You’ve incurred a capital loss by reversing.
Calculations of Taxes in Crypto Banking
Calculating cryptocurrency related taxes in crypto banking does not end with comparing your net proceeds to your cost basis after a purchase or sale. Additionally, the length of time you hold an asset determines the kind of capital gains or losses you realize. Cryptocurrency profits and losses will be categorized as “short-term” or “long-term” in crypto banks, and this classification will have a major effect on the amount of tax you owe.
- Profits and Losses from Capital Gains on Short-Term Investments. If you purchase and sell an asset within 365 days, you will either realise a short-term capital gain or loss, depending on the price paid for the item. Short-term profits and losses are taxed at the same rate as regular income, which includes earnings, salaries, and commissions.In 2021, regular income tax rates will range from 10% to 37%.
- Losses and gains on long-term investments. If you purchase an asset and then sell it within a year, you may earn or incur a long-term capital gain or loss. Paying tax on a long-term gain is usually less costly than paying tax on a short-term gain, since long-term profits are taxed at lower rates. There are presently three rates for long-term capital gains: 0%, 15%, and 20%. You will be assessed at a different rate depending on your income.
Additionally, capital losses may be compensated by capital gains in crypto banks. To begin, similar profits and losses must be neutralized. When you experience short-term losses, you initially lose short-term profits; but, when you suffer long-term losses, you gain long-term gains. If any residual net losses exist, they may be used to offset another kind of capital gain (e.g., long-term capital gains can offset short-term losses). Capital losses up to $3,000 may be used to offset ordinary income. After the first year, all capital losses are carried over to the next year under the crypto banking system.
Knowing how crypto assets are taxed in the context of crypto banking allows you to plan, file, and properly pay your taxes.
- According to the IRS, all cryptocurrency users must maintain careful records of all cryptocurrency banking transactions, including airdrops, lending interest, and any other activity that qualify as capital gains or income tax events. A majority of the main cryptocurrency exchanges and platforms provide tax reporting functionality. Additionally, you may discover third-party businesses that will do all of the research for you.
- Depending on the number of transactions you performed throughout the year, you may determine your profit or loss using an internet service or tax calculator. To get this amount, subtract what you sold (the initial price you paid) from what you paid for it.
- You must complete Form 8949 and attach it to Form Schedule D to report crypto capital gains and losses. Schedule D is the main tax form for capital gains and losses reporting.
For the modern cryptocurrency banking user it is important to understand the tax related procedures associated with cryptocurrency banking in order prevent any future difficulties with tax authorities.