Cryptocurrency taxation: what crypto activities can generate profits?

Cryptocurrencies are gaining more and more notoriety in Spain. So much so that they have begun to be regulated, and people who make profits from their operations with these digital currencies must pay a fee to the treasury. The ideal in these cases is to consult with a cryptocurrency tax advisor so as not to fall into any infraction.

But what kind of operations are we talking about? How can you get profit from using cryptocurrencies? Generating income with cryptocurrencies is possible. There are several options, and each of them requires at least a minimum prior knowledge of the subject (although some require a higher degree of understanding).

In this article, we explain the main ways to profit from trading cryptocurrencies and what each one is about.

Income-generating crypto activities explained by a cryptocurrency tax advisor

Whether you are just starting in the crypto universe or if you already have enough knowledge, there is always an option that you can try to generate an income with cryptocurrencies. These are the main ones:

Investments: long-term buying and selling of cryptocurrencies

The most popular way to make money with cryptocurrencies is through buying and selling them. More specifically, buying a cryptocurrency with fiat money when it has a particular value and selling it again when this value increases.

These transactions can be made in a digital exchange authorised for such purposes or peer-to-peer (between two people, without depending on a centralised system). In either case, the person who buys and sells cryptocurrencies must acquire a digital wallet since it is the medium in which cryptocurrencies are stored.

In the case of operating through a digital exchange, the same exchange grants a wallet to its users. In the case of operating in a particular way, a wallet must be downloaded on the mobile or the computer.

When buying cryptocurrencies with fiat money, you can pay in many ways depending on the digital exchange or what is agreed with the private seller: bank transfer, Payoneer, etc. The same applies when selling them.

These operations are usually done as an investment: a cryptocurrency is bought and held for months to years. Bitcoin is the most chosen cryptocurrency to make this kind of investment because it is the oldest, has grown the most over time and has an exclusive and highly secure blockchain.

Investing is different from trading. Later we will see their differences.

People who invest in cryptocurrencies for the long term are known as “holders”.

Cryptocurrency mining

Cryptocurrency mining is a process by which a person puts their technologies at the service of cryptocurrency transactions. If we go more in detail, mining consists of solving mathematical problems using one or more computers. The people who engage in this activity are called “miners”. When the computer or computers manage to solve the problem posed by the network correctly, the miner receives as a reward an amount of the cryptocurrencies that he is mining.

The work of miners is vital: through their technologies, operations with cryptocurrencies are carried out and verified worldwide. Thanks to their work, errors in cryptocurrency transactions are avoided, such as, for example, that no one can use the same cryptocurrency twice at the same time or that no one can introduce false cryptocurrencies into the market.

Miners should consider the costs of investing in appropriate software equipment and the cost of electricity. Mining consumes a lot of electricity, and they need to assess the electricity required to power the computers. They also need to cool all the heat they generate, so the electricity used increases significantly.

Assessing these issues helps decide whether it is profitable to go into mining.

Cryptocurrency trading

Cryptocurrency trading is about buying and selling crypto assets to profit from short-term price fluctuations. People who engage in this activity are known as “traders”. The exchanges they make can be between one cryptocurrency for another or between a cryptocurrency for fiat money. This mechanism is similar to the one used with the actions of the Stock Exchange.

To make a profit from trading, there must be a difference in the trader’s favour between the time he buys and the time he sells a cryptocurrency.

Trading is not easy, and it requires a solid strategy and a deep analysis of the cryptocurrency market to know what moves and when to make them.

In trading, the duration of operations can last minutes, days or weeks, depending on the strategy of each trader. Traders operate through specialised digital exchanges.

What differentiates trading from investing in cryptocurrencies is when crypto assets are held: while in trading, you speculate on market movements in short periods, in investments, you buy and hold cryptocurrencies for more extended periods, expecting profits to take longer to arrive.

DeFi: protocols and smart contracts

DeFi (decentralised finance) is a term used to describe all peer-to-peer financial services offered by different blockchains, mainly Ethereum.

DeFi offers many of the services of traditional banks: borrow money, lend money, earn interest, trade derivatives and assets, buy insurance, etc. The great advantage of DeFi, compared to traditional banks, is that it is a faster process, without paperwork, is anonymous, does not require a third party, and is open to everyone in the world. As if that were not enough, in DeFi, transparency is guaranteed: all the people involved in an operation can see all the transactions.

Through DeFi, it is possible to generate periodic interest from cryptocurrency deposits.

Staking

Staking is a process that allows you to obtain profits and voting rights on a cryptocurrency project by doing something straightforward, saving.

You must acquire cryptocurrencies and keep them locked in a wallet to do this. It is a process very similar to that of the investor or holder, only that in staking, the balances are blocked and cannot be used freely. The function of staking in the cryptocurrency ecosystem is crucial since it contributes to the operation and functioning of the blockchain of the cryptocurrency saved.

NFT

A non-fungible token (NFT) is a digital asset with a particular trait: it is unique and indivisible. This is because it has a unique identification code. An NFT can represent real-world objects such as art, music, cartoons, and videos. They are bought and sold online, usually with cryptocurrencies, and are often encrypted with the same software that many cryptocurrencies use—proof of ownership.

Under these characteristics, NFTs are much more than an option to collect digital items; they are a way to earn money. Being unique, NFTs can be revalued over time, just like a traditional work of art. So, they can be bought at a price, but their value can increase in the future, causing them to be sold at a higher price.

NFT or play-to-earn games

NFT games are a class of video games that are played online. The grace of them is that they use blockchain technology to buy, sell and rent unique game elements, which is why they become NFTs. Users can trade them with each other. In addition to NFTs, players can earn cryptocurrency rewards that can be exchanged in the real world.

As we have seen, there are many ways to earn with cryptocurrencies, and more may be developed in the future. The dedication and knowledge will condition the profitability of each one of them that they have on the subject.

Cryptocurrency tax advisor: is it possible that trading cryptocurrencies do not always generate profits?

Cryptocurrency operations do not always generate profits, or many times investment is made and can never be recovered. Therefore, before starting any operation with cryptocurrencies, it is important to inform yourself about the subject.

Cryptocurrency tax advisor: must the profits produced in any means mentioned above be declared?

The truth is yes. The Tax Agency considers that operations with cryptocurrencies can be a source of profit or loss, so they have a real impact on people’s assets.

For these reasons, Treasury Spain cryptocurrencies must be declared, specifically all operations with cryptocurrencies that have produced a profit for the taxpayer.

It is essential to determine how the cryptocurrencies should be declared and pay the corresponding fees since not doing so can generate a significant fine. A cryptocurrency tax advisor can help clear up doubts in this matter.

Conclusion

If you are thinking about increasing your income, cryptocurrencies can be a good option, and there are also many options that you can try. Do not forget to investigate the subject beforehand; you will minimise possible losses.

Finally, keep in mind the issue of cryptocurrency taxation. Evading tax responsibilities can result in a severe violation.