Taxation is a sore subject for many, and it is easy to find yourself on the wrong side of the law if you do not have all your ducks in a row. Just like with assets or income, you may pay taxes on cryptocurrency. Crypto taxation largely depends on where you live, how you acquired the crypto, and how long you have had it.
Some countries currently tax cryptocurrencies.
- Germany
- Australia
- The United Kingdom
- The United States
- New Zealand
- Canada
- Italy
- India
How does crypto taxation work?
Some governments treat cryptocurrency as property and/or income, which means trading it is a taxable event subject to either capital gains tax, income tax, or both. A taxable event refers to any transaction that incurs government taxes, which should be reported on your taxes.
Capital gains
Capital gains tax is a tax incurred when you sell property or investments such as stocks or shares. Selling and exchanging a cryptocurrency will attract a capital gains tax. The price at which you buy cryptocurrency will be used as the basis of taxation when you sell it, whether you incur a loss or profit.
Capital gains can be pegged on your income tax bracket and marital status. For example, in the US, your capital gain may be taxed at 0% if your taxable income is less than or equal to $41,675 if you are filing as an individual, $83,350 if married and filing jointly, or $55,800 if filing as the head of household.
How do I calculate crypto capital gains?
Capital gains tax is calculated by deducting the amount you paid for the cryptocurrency when you bought it from the amount you have received from its sale. The initial amount or cost basis includes all the amount spent in purchasing the cryptocurrency, including any exchange or blockchain gas fees.
You can either calculate the capital gains tax yourself or use online tax calculators.
Short-term vs long-term capital gains
Another factor that comes into play is how long you have had the cryptocurrency before selling it. Short-term capital gains (less than a year) usually incur higher taxes than long-term(more than a year) ones.
Income tax
Earning from cryptocurrency requires you to pay income tax. This amount is taxed immediately. You can earn from cryptocurrency in several ways.
- Mining rewards
- Interest rewards
- Staking rewards
- Referral rewards
- Airdrop rewards
Can I write off crypto losses?
Yes, you can write off crypto losses. It is the same process that applies when dealing with stocks and bonds. If you are in the US, the maximum amount you can write off in a year is $3,000. However, you will need to add them to your tax return
Can I avoid taxation?
Though cryptocurrency transactions are anonymous, blockchain technology permanently records all your activity. Moreover, some crypto exchanges fill out taxation forms, which may include your information. Therefore, your government can easily track your taxes by matching that information to anonymous wallets.
Are there tax-free transactions on crypto?
Yes, certain transactions do not incur tax.
- Using your cryptocurrency as collateral for a loan.
- Leaving your cryptocurrency in your wallet.
- Moving cryptocurrency between wallets.
How do I file for crypto taxes?
Governments that tax cryptocurrency transactions have a section on their tax return forms. If you forget to file, you can still amend your tax form and fix the error.
To file correctly, you must keep records and receipts of all your crypto transactions. Some of the things you will need to have in order are:
- The dates and amount(s) when you bought the cryptocurrencies.
- The dates and amount(s) you sold the cryptocurrencies.
- Total gain or loss.
- The tax forms. Some countries have multiple forms o be filled out. So, make sure you have all of them.
What are the tax evasion penalties on Crypto?
Failure to report gains and losses or underreporting cryptocurrency trades is viewed as tax fraud and will attract criminal or civil penalties. These penalties change depending on the country and may include fines on top of the tax you need to pay. Taxing governments do not care whether this failure is intentional or a mistake.
Some taxation bodies like the IRS give leeway when you are unable to pay crypto taxes.
How can I minimize my crypto taxes?
- There are different ways through which you can minimize your taxes.
- Use tax loss harvesting. This is the process of offsetting capital gains by claiming losses on other investments.
- Claim mining expenses. Mining is an expensive undertaking. You can add these expenses as you file your taxes.
- Hold your cryptocurrencies longer, and this will attract a lower rate.
In summary
Many governments are seeing the potential of cryptocurrency and have started imposing taxes on it. It is therefore paramount for you to understand your government laws to ensure you aren’t charged with tax evasion. If you are unaware of how to file your cryptocurrency tax, talk to a tax professional.
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