TL;DR
Figuring out crypto taxes is daunting. If you've owned more than one crypto asset, you'll want to put on a top hat and monocle to make the pain go away. Our Crypto Tax guide will help you figure out what's taxable when it's taxable, and how to report it all to the IRS (with a bottle of aspirin nearby).
Crypto taxes are a fact of life. Embrace it, and make the most of it! Dubious cash-outs are one of the biggest red flags for tax authorities. For example, if you’ve made money and then lived off $5K in cash withdrawals while being an obvious crypto whale, you might lose your liberty as well as whatever’s left in your bank account.
Above all make sure to consult a tax advisor as every jurisdiction is different. If you attempt to evade tax, you can end up with financial penalties and even harsher punishments.
Introduction
Do taxes make your head spin? You're not alone. There's a common misconception that Bitcoin and altcoins may be used anonymously, but that's just not true. Your wallet addresses can be tracked and your transactions are permanent and can be seen on the public blockchain.
It's important to pay your required taxes, so it helps to understand the tax regulations for crypto assets in your country just as you'd want to know their taxation policy on normal assets. Although crypto can be used anonymously in some cases, there are many instances where you could get in trouble with the tax authorities if you try to avoid paying capital gains or income taxes.
Do I have to pay taxes when I buy or sell?
Like most other things in life, getting tax right with your crypto is complicated. In general, you'll end up paying taxes if you sold your crypto (but not when you buy), and have gained value since you first bought it. As always, consult with a qualified tax professional for an analysis tailored to your specific situation; don't take the advice of anonymous strangers on the internet about taxes!
Nobody likes paying taxes. But sorting out cryptocurrency taxes can be tricky. Why? Because the rules are different for every country, and tax officials haven't agreed on a standard crypto tax policy yet. For example in the US, the IRS considers cryptocurrencies to be property and not currencies, which means you must pay capital gains tax. Nevertheless, it is your responsibility to stay informed about the tax regulations in your country.
What’s a taxable event?
A taxable event is an activity you're required to pay taxes on. In the United States, there are different kinds of taxable events. If you're considering trading cryptocurrencies, it's important to have an understanding of whether or not a taxable event occurs for trading and selling digital currencies like Bitcoin and Ethereum.
Whether you're trading Bitcoin or Ethereum, there is a taxable event that happens every time you make a trade. This means if your crypto asset appreciates and you sell at a profit, you'll be taxed. If you trade or sell that asset at a loss, that tax loss could be refunded back to you in the form of deductions. Anytime you sell cryptocurrency, you incur a taxable event (you have to calculate your gain or loss on the transaction). So if you buy one bitcoin for $10,000 and trade it for $20,000 a month later, that's a $10,000 capital gain. If you trade that same bitcoin for $5,000, that's a capital loss of $5,000.
Whether or not capital gains are a taxable event depends on your local tax authority. You may be able to deduct capital losses from your capital gains to reduce your taxes. Your overall amount of tax depends largely on the sum of these together. To help calculate this, taxpayers should note the date, cost basis (purchase price), sale value, and fees associated with all trading transactions.
What are taxable and non-taxable events?
Taxable events could include the following:
Selling your crypto for Fiat currency
Trading one cryptocurrency for another cryptocurrency
Buying things with your cryptocurrency (if you buy with appreciated crypto)
Receiving crypto as a result of a fork, airdrop, or mint
Generally speaking, these are events that are not considered taxable:
Buying cryptocurrency with fiat currency (except when the purchase price is lower than the fair market value of the coin)
Donating crypto to a tax-exempt organization (can be tax-deductible, make sure to consult a tax professional)
Gifting crypto under a specific limit
Transferring crypto from one wallet you own to another wallet
How is Cryptocurrency Taxed?
Bitcoin and other cryptocurrencies' official classification within a country will determine how they're taxed. Tax authorities commonly count crypto as a capital asset (i.e. appreciated financial asset) and not a currency. If your country hasn't passed specific crypto taxation laws, expect your crypto profits to be taxed according to their official designation (if any).
Cryptocurrency taxes are a complex topic and often differ from country to country. If you’re a full-time employee, freelancer, or crypto trader paid in crypto, you’re likely liable to pay income tax on your cryptocurrency earnings.
There are a number of factors that affect taxes on crypto trading, including the size of your gains, whether you are trading full time, and whether you hold your crypto as an investment or income. Make sure to identify what you do and have all available documents ready.
Do Tax Authorities know about my cryptocurrency?
Tax authorities such as the IRS, ATO, CRA, HMRC, and others track cryptocurrency transactions and enforce tax compliance. Large cryptocurrency exchanges also cooperate with authorities.
Chainanalysis is a company backed by several firms funded by the U.S. and Europe governments (among others). They provide powerful data analytics tools for governments to investigate cryptocurrency users.
Chances are if you have sold crypto for a profit or bought crypto, the government knows about it. The penalties for evading taxes are far worse, so make sure to pay the amount owed.
What happens if I don’t file my cryptocurrency taxes?
In many countries, tax authorities require you to file your taxes regularly. Failure to file can result in fees, penalties, interest, confiscated refunds, audits, and even jail time. File early and accurately so you don't get penalized.
Final Thoughts
Cryptocurrency taxes are an often overlooked topic and can be difficult to navigate. Because of that, we highly recommend getting professional help calculating your tax bill if you have any doubts. This may be the case especially if you’ve been trading and not just investing. The tax implications of regular trading are much more complicated. Make sure to use the resources and consult tax professionals about your situation.
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