Dive into the world of cryptocurrency trading and investing with this comprehensive guide. Understand the tax implications, risks, and benefits of crypto, and learn key steps to trade and invest successfully.
crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don’t have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units.
The profits earned from trading cryptocurrencies are taxed at a rate of 30%(plus 4% cess) according to Section 115BBH. Section 194S levies 1% Tax Deducted at Source (TDS) on the transfer of crypto assets from July 01, 2022, if the transactions exceed ₹50,000 (or even ₹10,000 in some cases) in the same financial year.24-Apr-2023. Please be mindful, however, that the TDS (Tax Deducted at Source) will be deducted from the entire selling amount, irrespective of whether you make a profit or incur a loss on your trade. TDS is applicable regardless of the trading outcome and will always be deducted.”
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What is the penalty for not filing crypto?
Failing to report your crypto gains and losses on a tax return can result in penalties, including a 5% monthly charge on the outstanding tax amount, capped at a maximum of 25%. Additionally, if your return is more than 60 days late, the minimum penalty would be $435 or 100% of the required tax.
Several key points to keep in mind Before investing in cryptocurrency
Step 1: Do your research to determine whether trading cryptocurrencies is suitable for you.
Active cryptocurrency trading might result in significant losses because they are well-known highly unpredictable investments. First and foremost, you need to thoroughly grasp the functioning of any cryptocurrency you choose to purchase before proceeding. Finding out if crypto trading fits your financial goals may be done by reading guidelines, investigating the blockchain, and watching the actions of seasoned traders. Never trade more than you can afford to lose, and prior to commencing, consider seeking advice from a certified financial advisor.
Step 2: Select between Long-Term Investing and Short-Term Trading.
The two main categories of investors are long-term and short-term. Both are quite distinct. Long-term investors purchase and hold cryptocurrencies for weeks, months, or even years, with the intention to sell at a profit or utilize the cryptocurrency in the future. On the other hand, short-term trading aims to profit from brief fluctuations in bitcoin prices by devising and implementing a trading strategy. Long-term investment is less active, less stressful, and less risky, but it also offers the potential for faster and greater rewards for those who execute it well. It also allows you to profit from both rising and falling bitcoin values.
Step 3: Choose the trading approach that suits you best.
Choosing an investment strategy is the next step. This is crucial as each strategy is unique and requires a different approach. It’s worth noting that the same cryptocurrency exchange may occasionally offer multiple trading alternatives.
Step 4: Acquire the knowledge of interpreting charts and executing trades.
Make sure cryptocurrency trading is appropriate for your situation and that you know the hazards before you begin trading. You’ll also need to understand how different order kinds function and how to read technical graphics.
Let’s focus on the lower section, where you enter buy and sell orders. In this case, pay attention to your order type and the quantity you wish to buy or sell. Binance offers market, stop-limit, and OCO order types in this scenario.
Market: Place a buy or sell order at the current market price to initiate trading immediately.
Stop-limit: After selecting this option, you will be able to set a stop price and a limit price. When the asset (such as Bitcoin in this example) reaches the stop price, it will attempt to sell for at least the limit price.
OCO (One Cancels the Other): This consists of a pair of stop-limit orders that cancel each other out if one is triggered. For both stop-limit and OCO orders, you need to specify an active duration.
The standard order types on most exchanges are market and stop-limit, while OCO is slightly less common. There may be instances where different exchanges offer additional order types or have slightly different restrictions on how they can be placed.
Step 5. Choose a market and begin Trading
Take into account the order types it supports, whether it offers leverage or derivatives, and the ease of integration with bitcoin trading bots when selecting a cryptocurrency trading platform. Furthermore, high-volume traders should consider fees and their potential impact on profit margins.
Pros of cryptocurrency
- Administration and maintenance of any currency are major factors for its development. The cryptocurrency transactions are stored by developers on their devices, and they receive the transaction fee as a reward for doing so. Since the blockchain participants are being paid for it, they keep transaction data accurate and up-to-date, ensuring the reliability of the cryptocurrency and the decentralization of records.
- Privacy and security have always been a significant concern for cryptocurrencies. The blockchain ledger is based on complex mathematical puzzles, which are challenging to decipher. This makes a cryptocurrency more secure than conventional electronic transactions. Cryptocurrencies, for enhanced security and privacy, employ aliases that are unrelated to any user, account, or stored data that could be associated with a profile.
- Cryptocurrencies have consistently positioned themselves as an ideal solution for transactions. Transactions, whether international or domestic in cryptocurrencies, are extremely fast. This is because the authentication process requires minimal time to process as there are few obstacles.
Cons of cryptocurrency
- If there is a disagreement between involved parties, or if someone inadvertently sends funds to an incorrect wallet address, the coins cannot be recovered by the sender. This can be exploited by unscrupulous individuals to defraud others of their money. Due to the absence of refunds, it becomes possible for individuals to create transactions for products or services they never received.
- While cryptocurrencies provide a high level of security, exchanges may not offer the same level of security. Most exchanges store user wallet data for the purpose of managing user identification effectively. This data can be compromised by malicious individuals, granting them unauthorized entry to numerous accounts.
- The creators aimed to develop practically untraceable source code, robust hacking defenses, and highly secure authentication protocols. This would render investing in cryptocurrencies safer compared to traditional cash or bank vaults. However, if any user misplaces the private key to their wallet, it cannot be recovered. The wallet will remain inaccessible, along with the amount of coins it holds. This will lead to a monetary loss for the user.
In conclusion, cryptocurrency is a digital form of currency that uses cryptography for secure transactions. It operates in a decentralized manner, without a central authority. When trading cryptocurrencies, it’s important to understand the tax implications and potential penalties for not reporting gains and losses. Before investing, conduct thorough research, seek advice from financial experts, and determine if crypto trading aligns with your financial goals. Choose between long-term investing and short-term trading based on your risk tolerance and desired rewards. Familiarize yourself with different trading approaches and learn to interpret charts and execute trades. Select a reliable cryptocurrency trading platform that suits your needs. While cryptocurrencies offer benefits such as transaction speed and enhanced privacy, there are risks involved, including the potential for irretrievable funds, security vulnerabilities, and the risk of losing access to wallets.
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The above comments do not constitute professional advice. The Author can be reached at [email protected] or visit our website www.financialtreecompany.com or call us on 9111872247 . My name is Maria Dsilva and I am tax consultant at Financial Tree Company (Your Honest Tax Assistant). We also make educational videos on Youtube and name of our channel is Financial Tree Company. Our main aim is to bring best possible solutions, spread knowledge and love.
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