Crypto taxes might be kind of tricky especially if you don’t like the fact that you have to pay them. Now, a lot of people would immediately frown, “Have to? Wait a minute, doesn’t it depend on your geography?”
Yes, it does, but there are already countries where cryptocurrency tax evasion has serious implications.
For instance, in the U.S., the IRS (the Internal Revenue Service) want you to pay taxes on crypto, and if you don’t, you become subject to a $10K fine, to begin with. In this article we will cover crypto taxes in the USA and other countries.
How is crypto taxed
First and foremost, let’s deal with the basics. In order to report taxes, you should clearly understand what you need to report.
The problem with crypto is that it has a specific status in different parts of the world.
For example, in the U.S., cryptocoins are considered property. But keep in mind that although a home, a stock and cryptocurrencies are capital assets and significant pieces of property, the IRS views them all differently.
The UK doesn’t consider cryptoassets to be currency or money, but crypto holders are still liable to pay capital gains tax.
In Israel, the situation is somewhat the same. The Tax Authority will regard crypto as subject to the country’s 25% capital gains tax.
If you live in a country where there is no legislation that definitely allows or forbids any activity that has to do with crypto (for example, in Russia), the benefit of the doubt shall be given to you.
That being said, you can apply one of the above cases to your situation and take it from there. The point is to understand how your country treats crypto. Do they tax crypto the same way they’d tax property, capital gains or do they not tax it at all?
Your further actions depend on the answer to the previous question.
As the U.S. is one of the most developed jurisdictions on the planet in terms of the crypto tax legislation, and other countries will likely follow the standard in the future, we will cover their policy on the subject here
How much tax on crypto gains
Now, how much crypto do you have to tax if you’re not a company but an individual with crypto on accounts? What if you’ve been trading since 2013? What if you’ve been trading for only five months?
Unfortunately, you will have to tax your gains in both cases, but depending on whether we’re talking about short-term (<12 months) or long-term (>12 months) revenues, the tax rate will be lower or higher.
What is considered a short-term capital gain in the U.S.? It is a capital gain from an asset that has been held for less than a year.
Say, you bought Ripple (XRP) nine months ago and sold it at a gain two weeks ago. The moment you sold your crypto assets is called a taxable event, and the timing of this taxable event – sooner than 12 months after purchasing the asset – determined the short-term status of your capital gain tax.
If you’re single and you’ve made $9K over the past 8 months while holding Ripple (XRP), you owe 10% tax to the government.
There is a specific table with tax rates for short-term capital gains that will help you define your debt.
As for long-term capital gains tax rates, it is a capital gain from an asset that was being held for longer than a year.
Say, you bought 4 Bitcoins (BTC) in July 2015 for $250 each and since then, you were holding it on top of your exchange. Over the past five years, the value of the asset has significantly increased.
In November 2019, you met your future wife or husband, decided to invest all of your capital into a mortgage and sold all of your Bitcoins (BTC) for $9K each, making $36K in total and a profit of $35K minus commissions.
Once you transferred your crypto from an exchange to your bank account, you triggered a taxable event.
But because you’re still not married and made less than $39K over the past five years, you owe nothing to the government.
Take a look at the table of long-term capital gains tax rates to assess your own situation. Taxes for long-term gains are generally lower than those for short-term capital gains.
Can you claim crypto losses on taxes
It is important to report not only cryptocurrency gains on taxes. Cryptocurrency loss tax reporting should be taken just as seriously. There are 2 underlying reasons for that:
- Most important one is that the IRS Cryptocurrency virtual guide stated that cryptocurrencies are considered as property and treated accordingly. Thus, according to the IRS Guidelines, all sales of cryptocurrencies should be reported.
- Crypto losses taxes can be used to offset capital losses or to deduct up to $3k from your income. The loss tax is deductible from future incomes as well.
In short, you can deduct up to $3,000 of your losses from your income of the previous year. If you deduct $3,000 from your income but still you have more losses, then you can carry forward the rest of the losses to deduct from future years and deduct cryptocurrency income from future years.
You can only deduct cryptocurrency losses on tax if total capital losses across all your assets is negative or in loss.
One thing that you should keep in mind is the following. If you report that you have crypto losses, but enough capital gains with other capital assets (in other words your balance is in surplus) during the tax year, then you cannot deduct the losses. your crypto losses will still offset capital gains in other assets when it comes down to reporting crypto losses.
Crypto tax calculator review
To calculate the amount of taxes you owe and to automatically generate your cryptocurrency tax reports, you can use cryptocurrency tax calculators.
- CryptoTrader.Tax calculator
This cryptocurrency tax calculator helps you calculate your gains, losses, and income from all of your cryptocurrency activity whether it was from algo trading, mining, or just simple investing. The calculator works by pulling in your historical transactions from all of your crypto platforms, exchanges, mining pools, etc. Pulling in your transaction history just takes a few button clicks.
Once all of your trade data is pulled in, you can generate your capital gains and losses forms as well as income reports. All of these documents can be used for quickly filing your cryptocurrency information with your tax return. You can even import these reports into platforms like TurboTax.
When to report crypto on taxes
Whenever you trigger a taxable event from your crypto investing activity, you’re required to report a tax event.
A taxable event simply refers to an event where realised income taxes place. As seen in the IRS virtual currency guidance, the following are all considered taxable events for cryptocurrency:
- Trading crypto to fiat currency like the US dollar
- Trading one crypto for another cryptocurrency
- Spending crypto to purchase goods or services
- Earning crypto as income.
At the same time, some crypto activities do not trigger tax events. You are not required to pay taxes if you:
- Buy and hold crypto
- Transfer crypto from one wallet you own to another wallet you own
How to pay taxes on crypto trading
Crypto tax reporting
When preparing a report on cryptocurrency gains, keep in mind that not only should you report gains as a result of a trading activity on cryptocurrency exchanges. Profit that stemms from airdrops, mining and as a result of forks should also be reported.
With the crypto tax calculator (Bitcoin.Taxes, for example), you can simplify this process. With some calculators, you can add not only exchanges but also crypto wallets.
What will the final version of your report to the U.S. IRS look like? It will be a regular IRS Form 8949 filled with your crypto transactions history.
Once you’re ready with this part, you will have to manually transfer your data to Schedule D.
Yes, that all sounds time consuming. That’s why it is recommended to automate at least a part
Mining cryptocurrency taxes
As it was mentioned above, you should report not only trading events, but also mining cryptocurrencies. If you mine 0.1 BTC a day, the gains are recalculated in USD and are considered an income and taxed accordingly. Crypto mining taxes are reported with the same procedure as other cryptocurrency earnings taxes.
How to track crypto transactions for taxes
As you can see, to calculate your capital gains and losses from your crypto trading activity, you need to have records that keep track of your cost basis, fair market value, and USD gain or loss every time you dispose of a crypto (trade, sell, spend etc).
To compile a tax report on cryptocurrency, one needs to keep track not only of each transaction made, but also of all the market prices at the time of a trade. If some piece of information goes missing, you won’t be able to establish the size of the realized income and loss and thus, tax reporting would be impossible.
If you are a lucky owner of multiple crypto assets, stored in different wallets and on multiple exchanges, keeping track of all the cost might be a tiresome task.
Top crypto tax software companies 2021
Fortunately, in most cases, you can use crypto software which automates the processes and saves time. Depending on your country of residence, you might want to use different solutions. BitcoinTaxes, CryptoTrader.Tax or CoinTracking are products that are good to go if you need to generate a report for the U.S. IRS.
With this crypto tax helper, the process looks like this. You choose a service, select a correct tax year, import all of the trades from their exchange, download the CSV files to the dashboard of the software and generate the report.
Cryptocurrency tax laws 2021
The taxes on cryptocurrencies earnings and crypto tax reporting we’ve covered so far in this article are true for the crypto taxation rules established by IRS.
Let’s recap the main point:
- Cryptocurrencies are considered properties, all crypto sales should be reported for the taxation purposes.
- Cryptocurrency taxation rules in the US establish that crypto losses can be used to offset capital losses or deduct up to $3K from the income.
The cryptocurrency taxes should be reported using IRS Form 8949. To pay taxes you need keep track of every transaction made or you may hire a crypto tax professional.
If you ever wondered if you have to pay tax on cryptocurrency in the UK, the short answer is yes, absolutely. From a tax perspective, UK tax laws consider dealing with cryptocurrency very similar to engaging with other assets such as stocks, bonds, and real-estate. So a trader should report taxes on all the cryptocurrency gains received.
This means that capital gains and losses rules are applied when a cryptocurrency asset is disposed of. HMRC sheds some light on what disposals include:
- selling cryptocurrency for money
- exchanging cryptocurrency for a different type of cryptocurrency
- using cryptocurrency to pay for goods or services
- giving away cryptocurrency to another person
So when you execute one of the actions from the list above, and you become subject to capital gains taxes on any gains or losses you realize, just as it would happen if you were trading stocks or bonds.
How to pay taxes on cryptocurrency in the UK? The procedure is the same. Report you cryptocurrency gains and lossed together with real-estate and other kind of taxes
The Australian Tax Office released official guidance on the cryptocurrencies taxation.
Similarly to the UK, Australian Capital gains tax (CGT)-applies to a cryptocurrency at the time it is disposed of. You dispose of cryptocurrency when you sell it, trade it for another cryptocurrency, or use it for a purchase etc. Income from cryptocurrency according ro cryptocurrency tax laws in Australia is viewed just the same as income from any other activity.
The cryptocurrency capital gains in Australia are calculated as the difference between the AUD value of the cryptocurrency at the time it was disposed of it minus the AUD value of the cryptocurrency at the time it was acquired.
Australian Tax Office requires that you keep records of every capital gain event for five years after the disposal took place.
Income taxes – apply for cryptocurrencies that you have earned — whether that is through a job, mining, staking, or other means. Income tax is charged on the fair market value of the coins you earned at the time you earned them.
The Canadian Revenue Agency (CRA) considers cryptocurrency a commodity when it comes down to taxation. This means that any income you receive from cryptocurrency transactions is treated either as business income or as a capital gain— depending on whether cryptocurrency is your hobby or business. Similarly, in case of losses, these are treated as either business losses or capital losses.
For most Canadians that are casually investing in a cryptocurrency like Bitcoin, their associated income will be considered capital gains, not business income.
They know how much crypto you have
If you’re still sceptical and think that you shouldn’t pay taxes on crypto at all, here is a list of interesting facts.
In 2016, the IRS sent a quiet request to Coinbase asking them to turn over identities and full transaction histories of millions of customers who traded on top of the platform from 2013 to 2015.
Fact number two is that the Internal Revenue Service has purchased specific software to track people using Bitcoin.
Last but not least, Clinton Donnelly, crypto tax lawyer, said that we all “will be astonished” about how much the IRS knows about every crypto trader in the U.S.
The expert added that the IRS has an agreement with NSA (The National Security Agency), which tracks all the Coinbase emails. “After the very first email Coinbase sent you, IRS immediately noticed you,” Clinton explained.
He also mentioned that there are too many users, so your first letter will be computer-generated. “And then they will hit you with more computer-generated letters. Each computer-generated letter is going to include a $10K fine against you. You’re automatically guilty and will have to prove you’re innocent.”
Now, considering that some of you reading this are libertarians who don’t want to have anything to do with the governments – we understand. But don’t forget that governments all over the world are constantly working on their crypto legislations, and the times are changing. Nowadays is not the same as 2013, and it’s much safer to pay taxes on crypto than not.
This article is not financial advice. To learn about your situation in detail, consult a crypto lawyer.