Cryptocurrency and Taxes

Cryptocurrency and Taxes

A Beginner’s Guide to Navigating Cryptocurrency and Taxes. Cryptocurrencies have gained immense popularity as a digital investment asset class, but along with potential profits comes the responsibility of understanding and managing Cryptocurrency and Taxes. This article is designed to help beginners understand how taxes apply to cryptocurrencies in different markets and the key considerations for tax planning when investing in cryptocurrencies.

Crypto Tax Regulations are here!

If you’re in the U.S., the U.K., Japan, Canada, Australia, or many European countries, then the subject of Cryptocurrency and Taxes is something you need to take seriously. These are some of the countries that already have tax regulations in place, and they expect their citizens to pay those taxes reliably.

Many of these countries are now also working with exchanges and chain analytic companies in order to track transactions, so if you think the tax man doesn’t know about the Bitcoin you sold this year, then you may be in for a nasty surprise. If you buy or sell crypto on a major exchange, it is best to assume that the government is most likely going to know about it and have access to all of your transaction data.

Here’s a table that shows how cryptocurrencies are classified by these countries, and what taxes citizens are required to pay:

Country	How Crypto is Classified	Type of Tax paid
United States	Property	Crypto income and capital gains
Australia	Property	Crypto income and capital gains
Japan	Miscellaneous Income	Crypto income and capital gains
United Kingdom	Chargeable Asset	Crypto income and capital gains
Canada	Commodity	Crypto income and capital gains

There are so many ways to earn crypto income, many of which are taxed differently, so it may be a good idea to seek advice from a tax professional as it can be confusing.

What types of Crypto activities are Taxable ?

Here are just some of the different crypto-related activities that are subject to taxation in many countries:

• Selling for fiat at a profit or loss
• Exchanging digital assets on a DEX or centralized exchange
• Receiving airdrops
• Sale of NFTs
• Earning income from Blockchain and P2E games.
• Staking income.
• Crypto mining.
• Using crypto debit cards.
• Earning rental/advertisement income from digital land or renting NFTs.
• Providing a service and getting paid in crypto.

Understanding Cryptocurrency Taxation in your Country:

Cryptocurrency taxation varies by country and jurisdiction, and as such, there is no one size fits all magical approach to optimizing your tax efficiency, which makes it crucially important to understand the individual tax laws in your area. To aid in your individual research into this area here is a breakdown of the areas you should consider researching:

1. Classification of Cryptocurrencies:

Different countries classify cryptocurrencies differently. Some view them as property, others as currency, and some even as commodities. The classification affects how they are taxed and so make sure that you understand the classification first as this will help inform you of the likely tax implications of the assets that you are holding.

2. Taxable Events:

Tax liability arises from specific events, such as buying, selling, trading, mining, and receiving cryptocurrency as income. Understanding what constitutes a taxable event is very important prior to submitting any tax filing and so you will need to research all of the above types of events to get a complete view of the tax liabilities that apply.

The below diagram illustrates taxable events from the circulation of a cryptocurrency, taken here to be Bitcoin (BTC). The sender, via miners, purchases a service from the receiver using BTC, and the receiver has the options to either dispose the BTC or purchase a service with the BTC. It should be noted that these transactions can be peer-to-peer (P2P), or via decentralized or centralized exchange, which does not affect the policy treatment but affects tax enforcement capability (P2P being most difficult, followed by decentralized and finally centralized exchange).

 

3. Holding Period:

Many countries differentiate between short-term and long-term capital gains. The length of time you hold a cryptocurrency can impact the tax rate. Again, it is important to understand how this plays out in your country and so this should also be a key research area to consider.

4. Reporting Requirements:

Most tax authorities require individuals to report cryptocurrency transactions and holdings. Accurate record-keeping is crucial to comply with tax regulations. There are already a number of easy-to-use applications that will do a lot of the work for you when its time to submit your tax returns. The link here will show some of the most popular options at the time of writing this article.

5. Tax Rates:

Tax rates for cryptocurrencies can vary widely, depending on your country and the nature of your transactions. Short-term gains are typically taxed at a higher rate than long-term gains. Depending on your specific circumstances, cryptocurrency can be taxed as long-term capital gains, short-term capital gains, or ordinary income.

In the US as an example:

Ordinary income tax: If you earn cryptocurrency — whether through your job, mining, staking, or airdrops — you’ll recognize ordinary income subject to income tax. This can range from 10% – 37% depending on your income level.

Meanwhile, cryptocurrency disposals are subject to capital gains tax. Examples of disposals include selling crypto, trading your crypto for other cryptocurrencies, or making a purchase with crypto.

Long-term capital gains tax: If you’ve held cryptocurrency for more than a year, your disposals will be subject to long-term capital gains tax. This ranges from 0%-20% depending on your income level.

‍Short-term capital gains tax: If you’ve held your cryptocurrency for less than a year, your disposals will be subject to short-term capital gains tax. For tax purposes, this is treated the same as ordinary income and can range from 10% – 37% depending on your income level.

 

Deductible Expenses:

Knowing what you can make tax deductions can help reduce your tax liability. When it comes to Cryptocurrency taxes, fees are one of the things that investors are allowed to deduct from the final sale price of an asset. Crypto fees are the processing fees built into the networks that maintain the cryptocurrency network. The money you pay acts as an incentive for the people operating the computers that keep the network alive. That’s how the blockchain network works. You can think of crypto fees as similar to transaction fees.

1. Exchange fees: 

Most crypto trades take place on exchanges like Coinbase, Binance, Kraken, Gemini, and many more. For an exchange to make money, it needs to attach to some of the financial momentum flowing through it. In most cases, that means assessing fees for common transactions, such as:

2. Trading fees: 

Fees associated with buying and selling crypto on a exchange.

3. Conversion fees:

Exchanges may charge a fee to convert one fiat currency into another, before a trade can be made.

4. Withdrawal fees:

Withdrawals can be made up of blockchain transaction costs and an additional fee based on your country or the type of withdrawal, like crypto vs fiat.

5. Interest / Borrowing / Liquidation Fees :

Some exchanges like Binance, Aave, and Uniswap offer crypto margin trading: the ability to borrow additional funds to increase your position and create leverage. These exchanges typically charge additional fees based on the amount borrowed on margin and an interest rate determined by the supply of funds available. Additionally, if your trade crashes and the position is liquidated you may be charged an additional fee.

6. Deposit Fees :

Cryptocurrency deposit fees vary based on the type of deposit but are less common than withdrawal fees since exchanges want to incentivize users to fund their account.

7. Network transaction fees:

Network fees, also known as mining fees or gas fees, are paid to the blockchain network involved in the trade, like Bitcoin or Ethereum as examples. These fees reward miners and forgers for the work they do to validate the block chain via consensus methods like Proof of Work, Proof of Stake and Delegated Proof of Stake.

On the Ethereum network gas is the pricing mechanism used and traders must pay a gas fee in order to make a transaction or execute a smart contract. Fees are paid in GWEI — a denomination of Ether.

The Bitcoin network charges fees in Satoshis — the smallest unit of a bitcoin.

On the Binance Chain and DEX transaction fees are paid in BNB.

8. Transfer fees:

Transfer, or wallet fees, occur when investors withdraw or send cryptocurrency from one wallet to another.

Top tips for Crypto Taxation:

1. Research Local Regulations
   Investigate the tax laws and regulations specific to your country or region. Consult tax authorities’ websites for guidance.

2. Maintain Accurate Records:
   Keep detailed records of all cryptocurrency transactions, including dates, amounts, counterparties, and associated costs.

3. Use Tax Software:
   Consider using cryptocurrency tax software to automate record-keeping and tax calculations.

4. Seek Professional Advice:
   If your crypto tax situation is complex, consult a tax professional with expertise in cryptocurrencies. They can provide tailored guidance.

To wrap it up

In summary, understanding cryptocurrency taxation is essential for any crypto investor. By researching local regulations, keeping meticulous records, and seeking professional advice when needed, you can navigate the tax implications of your cryptocurrency investments more effectively. The tax advantages, such as lower rates and privacy, can be appealing, but the complexity and record-keeping burden should not be underestimated. Ultimately, responsible tax management is an integral part of maximizing the benefits and minimizing the risks of cryptocurrency investments. Remember that with good practices often comes great rewards!

 

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The content of this article or any content from CryptoCollege.cc is for educational purposes only.  It is not investment advice. Therefore, investors must do their due diligence before making any type of investment decision. Read more here.

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