For the past two years, individuals and institutions have gained so much interest in cryptocurrencies – even in wake of falling prices. For state authorities, crypto taxation is among the high priority areas as governments around the world are interested in cashing in on the market by taxing crypto traders and investors.
As an outcome, many in the crypto community pointed hands at the 2017 tax season for being the cause of the early 2018 crypto price falls because people had to sell their earnings to cover their tax obligations. This time, the story isn’t entirely different as crypto prices have fallen drastically for the whole of 2018 and still hasn’t shown any signs of fast recovery.
Whether prices are falling, rising or even stagnant, none of these situations prevent a crypto trader or investor from paying taxes. As we begin 2019, every crypto trader should be alert of their tax obligations so as not to be taken aback when the time finally arrives. This piece will guide you through the ins and outs of crypto taxation and how to stay out of trouble with any tax authority.
What you need to know about crypto taxation: first things first
Crypto taxation is a complex topic not only for authorities but also for businesses and individuals. Regulations differ by country and tax brackets is based on which country you find yourself as a crypto trader and investor. Here’s what you need to know:
Which tax category affects you or your crypto business?
The kind of tax you pay as a crypto trader, investor or business engaged in crypto depends on how your country views cryptocurrencies. Your country might consider cryptocurrencies as assets, private money, commodities, or property. Legally, this will put you under one or two tax brackets, including personal income tax, capital gains tax, and company or business tax or you could even be exempted from paying any tax.
Each and every country has some form of crypto taxation rules and regulations for traders and crypto-based institutions. Regulatory authorities in the UK and US define cryptocurrencies as assets and not currencies. In the legal realm, this means investors and traders are obliged to pay capital gains tax, which come in the form of short- and long-term tax brackets.
For example, crypto traders and investors who cash out after a year fall under the long-term capital gains tax section. Other countries follow similar footsteps. Although Japan categorized cryptocurrencies as commodities in 2017 and ended its consumption tax of 8%, it still adheres to capital gains tax, income tax, and company tax rules for individuals and companies engaged in crypto.
Other countries have taken a completely different stance when it comes to taxing crypto dealings. In Canada, cryptos are classified as commodities and are therefore taxed as capital gains or business income. The same goes for the Netherlands, where the government announced that cryptos will be treated as barter items and would be subject to income tax regulations.
Bitcoin is categorized as a foreign currency in Switzerland and does not attract capital gains tax, while Italy places zero taxation on crypto-related businesses. In Brazil, cryptocurrencies are considered assets and subject to taxation. Other countries, including Venezuela, South Korea, South Africa, India, China, and Russia among others have their crypto tax regulations in the pipeline.
Which crypto activities are taxable?
What crypto engagements add you to the crypto taxation list? There are many. Whether you are a day trader or a long-term holder, there are a lot of crypto events that put you in the tax bracket and are normally based on your country’s rules and regulations on cryptocurrencies, including:
- Paying for goods and services with cryptocurrency
When you buy goods and services with a cryptocurrency like Bitcoin, you are subject to pay tax. While you will pay VAT in the US, the tax that comes with buying goods and services in other countries might differ.
- When you receive your mined cryptocurrency
Whether it’s BTC, ETH or BCH, you are subject to pay tax when you receive earnings from your crypto mining activities.
- When you are paid in cryptocurrency
When your employer pays you in crypto (BTC, ETH, etc), the payment is categorized as compensation and therefore taxed based on your income tax bracket.
- Selling your cryptocurrency for cash
Whenever you sell your crypto for cash, the amount realized is subject to tax.
From buying crypto with crypto to cashing out your earnings, you are subject to tax depending on your national regulations. Although many countries have not instituted clear crypto taxation policies, you should always have knowledge of your nation’s stance on this issue in order to be on the safer side.
Which crypto activities are not taxed?
Just like tax holidays and exemptions, there are crypto activities that do not attract any form of tax, even in countries where cryptocurrencies are highly taxable. These activities include, but not limited to:
- Acquiring cryptocurrency with cash and keeping it
If you are a trader or investor who buys cryptocurrency for the purpose of holding, you are not subject to any form of tax. Since you are not selling or making any gains or losses as a result of your activities, you don’t have to worry about crypto taxation at that point.
- Crypto donations
When you donate cryptocurrency to a qualified non-taxable, non-profit or charity organization, your crypto activity is exempted from taxes of any kind.
- Crypto transfers
When you are moving your crypto from one wallet to another, you are not obligated to pay taxes. You will, however, have to ensure that your exchange is not deemed as a disposition.
What to do next?
After identifying your country’s stance on crypto taxation and knowing whether you are taxable or not based on your transactions, your next step is to get yourself prepared to file your taxes if you are affected. Here’s how to go about it.
Filing your taxes
Do we really have to pay taxes as crypto traders and investors? As much as transactions do not deal with real names but rather with a string of characters and can serve as a hiding place for many of us, it doesn’t hurt to be a good citizen who pays his/her taxes. Crypto is going to be the future of money and create a new financial system that will do away with our current inefficient and corrupt system, but until then, it’s good to abide by our laws. So go file your crypto income if you are within a jurisdiction that demands so.
Keep records of your transactions
If you are ready to pay your crypto tax, you will need a tax bill and that will be calculated using your transaction history. Ensure you have the necessary details about your crypto events, including the date of your crypto acquisition, date sold, its dollar value both during buying and selling, and the proceeds realized.
Get rewarded for holding in the long-term
In the US for instance, the IRS regulations on property rewards long-term investors. This means that being patient with your crypto assets pays off in the long-run. Capital gains taxes imposed on crypto assets held for over one year are lower compared to those held for less than a year.
Crypto taxation tools: these tools will help you report and calculate your crypto taxes
Crypto is still new and filing taxes for them is still a misery to even some accountants. There are, however, some good tool developed to help traders and investors calculate their crypto earnings and the amount of taxes they are to pay without much hustle. Let’s take a look at some of them:
Bitcoin & Crypto Tax Calculator by TaxAct
The Bitcoin Tax Calculator is a crypto tax calculator that will help you determine your crypto income or losses and how much tax obligation you need to settle.
TrustVerse is a wealth management platform that leverages smart contracts to help you organize your digital identity and assets through the blockchain. This information ensures that your tax obligations and records are immutably addressed, and helps you present a clear transaction record for tax purposes.
CoinTracking is software that analyses over 6000 coins and generates real-time reports on the value of coins, profit, and losses, unrealized and realized gains, crypto tax obligations and much more.
ZenLedger for Crypto Taxation
ZenLedger is a provider of crypto tax calculation service for traders and investors. The platform allows users to import their crypto transactions from exchanges and wallets to enable them to calculate their income, capital gains, and tax obligations.
Cryptotrader.tax is a simple, yet powerful tool for crypto traders and investors. Among other features, cryptotrader.tax allows traders to calculate their tax liabilities, import their trades, and export tax documents for easy filing.
Another cryptocurrency tax calculation platform built for traders, investors, and CPAs. Bear.tax allows investors to calculate their crypto taxes, import their trades, and calculate their gains among others.
Crypto taxation is evolving year by year as governments get to learn more about the industry. In the coming years, more countries will join the journey, either to tax crypto investors or exempt them from any tax obligation. It pays to be abreast with events in the industry so as not to be caught off guard.
Featured image courtesy of: Komfie Manalo @cryptovest.com