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I am not a tax advisor, or even a tax specialist! Nothing in this article is tax advice.
Contact your tax advisor if you need advice on dealing with your crypto tax situation.
As was said long ago, the only two certainties in life are death and taxes.
For a long time, cryptocurrency enthusiasts believed that crypto was anonymous, so their earnings from trading in and out of coins/tokens would be tax-free.
They were wrong, especially in the U.S., where crypto tax reporting requirements are enormous.
This article covers the U.S. situation, along with a look at Canadian, U.K. and other countries’ cryptocurrency tax reporting requirements.
The U.S., which taxes every citizen and permanent resident on all of their global income, considers crypto assets to be property. It does not consider them to be money.
That means that you pay capital gains taxes on crypto. That wouldn’t be so bad except for the requirement that you have to pay it on every single transaction you make.
And, of course, if you earn any crypto as income, that’s taxable too. Although in this case, you’ll pay income tax on it, not capital gains tax.
Keep in mind that those IRS demands don’t just apply to Bitcoin. Insert any of the over 17,000 crypto coins and tokens into those bullet points above. Still taxable!
So you need to keep impeccable records of every single transaction you make for every single coin/token you own now or owned during the current taxation year.
The only ray of sunshine in all this is that you can use any losses you incur during the year to offset the gains.
If you bought some Bitcoin at $50,000 and BTC’s price is now $40,000, selling it or using it to buy something means you lock in the $40,000 price for tax purposes. Whatever the dollar value is of that loss, you can use that to reduce your gains.
Holding (or HODLing, as it’s called in the crypto world) an asset has no crypto tax reporting demands. It’s only when you dispose of that asset that you have to report it.
Transferring crypto from a wallet you own to another wallet that you own also is not considered a disposal, so there are no tax reporting requirements.
However, transferring from a wallet you own to a rewards platform is a disposal, since you don’t own the wallet where the asset is stored on the platform.
In other words, the crypto is not technically yours, just as dollars you deposit into a bank aren’t technically yours either
Calculating gains and losses is the simplest part of the entire process. For each transaction that’s a disposal of a crypto asset, the formula is:
Fair Market Value – Cost Basis = Capital Gain/Loss
Fair market value (FMV) is the price of the asset on the open market. The easiest way to determine that is to record the price at the time you sell the asset.
If you’re doing that on an exchange, there’s a record of what the price was. If you’re doing that privately, or selling a non-crypto product or service, check the price on coinmarketcap.com.
Keep in mind that the FMV isn’t the actual price of that asset (e.g., $50,000 Bitcoin). It’s the value of the amount of crypto you sell or trade at the time of that transaction, based on that price.
The cost basis (CB) is how much you paid for the crypto asset. If you bought .01 BTC at $50,000, you paid $500 for it. That’s now the cost basis.
If the price goes up to $60,000, and you sell .005 (half of what you bought), you receive $300 for it.
You have to report that $300 on your tax form. But you don’t pay capital gains tax on the entire $300. You pay it on just the $50 gain (remember, FMV – CB = capital gain).
You paid $250 for one-half of the Bitcoin amount you bought. You sold it for $300. Your gain is $300 (FMV) – $250 (CB) = $50.
If you make multiple transactions in a year (e.g., buying 1 Bitcoin three different times at three different prices, and then selling some of your BTC), use the First-In First-Out accounting method to determine the cost basis.
What this means is that if you bought BTC at $10,000, $20,000 and then $30,000, if you dispose of some, your cost basis is calculated at the $10,000 price first, until you’ve disposed of enough to get to the $20,000 price.
Remember to add transaction fees and network fees (also known as gas fees on some networks) when calculating your cost basis. If it cost you $5 in fees in the example above, your capital gain would be $45, not $50.
Reporting every transaction is onerous enough. Having to use the right form for each type of transaction makes it tougher.
For gains and losses from trading (buying and selling) on an exchange (Binance, Coinbase, etc.), you use Form 8949. That’s the same form you use for reporting stock and bond capital gains/losses.
If you’re paid in crypto for work you perform, that’s considered ordinary income and is taxed at whatever your marginal tax rate is.
Any rewards you earn from Freeway, Binance Savings, Okcoin or other rewards platform are also considered ordinary income and are reported on Schedule B.
However, if you make income from crypto as a business (crypto mining income, for instance), that goes on Schedule C.
If you receive crypto as a result of an airdrop or a blockchain fork, that goes on Schedule 1 as other income.
If you HODL your crypto for more than 12 months, you can drop your U.S. capital gains tax bill by almost 50% if you’re in the highest tax bracket.
This reduced rate doesn’t apply to rewards you earn while you HODL. Those are taxed as ordinary income at your marginal tax rate.
I could drone on and on. I’m not a crypto tax expert. So I’ll leave you in the hands of professionals. This article is an excellent guide to all things crypto tax reporting and calculations for U.S. taxpayers.
It also includes information about how the IRS knows about your trading transactions, and what happens if you don’t report your transactions or pay your crypto taxes owed (if any). Spoiler alert: it isn’t pretty!
Want to reduce your crypto tax headaches? Use software designed to do most of the heavy lifting for you. CoinLedger.io is one of several available to you.
Things are a bit different in Canada. The Canada Revenue Agency sees cryptocurrencies as a whole as a commodity.
So you’ll pay capital gains tax on any gains (minus losses) if you’re an individual. If a business is trading crypto, income is considered business income.
If you’re day-trading crypto, gains are more likely to be considered business income. If you’re making the occasional trade, hoping for longer term price appreciation, gains will be considered capital gains.
In Canada, only 50% of capital gains are reportable. Likewise, 50% of capital losses are reportable.
See this article for more about all things crypto tax in Canada.
In the U.K., cryptocurrency isn’t money. So you have to pay capital gains tax on all income from trading crypto.
Read this article to learn about the U.K.’s Same Day Rule and Bed & Breakfast Rule, and how they’re used to prevent wash sales that investors use to harvest tax losses.
Like the U.S., Australia taxes income from trading cryptocurrencies as capital gains, and income from rewards, staking, mining, a job, etc. as ordinary income.
For more details about paying crypto tax in Australia, check out this article.
Don’t want to deal with crypto tax issues? There are some accountants who are familiar with and up-to-date on cryptocurrency tax regulations.
Most accountants are not crypto experts, or even familiar with the tax regs.
Make certain the one you choose knows what he or she is doing when it comes to filing your taxes for your crypto trade capital gains and losses and any interest you earn from crypto.
If you want to stay ahead of inflation and flourish during retirement, and don’t have a lot of money, crypto price appreciation and crypto rewards are the best way to do that.
And that will mean paying tax on your earnings, just as you have to pay tax on the minuscule amount of interest your bank will pay you annually.
If you HODL your crypto assets long-term, you’ll pay less crypto tax, and you’ll have fewer reporting headaches.
If you’re going to HODL, you may as well earn something while you’re doing it.
Check out Freeway, which offers 200X up to 430X or more interest than your savings account will pay you.