Written by 5:32 am Cryptocurrency

Taxes on Cryptocurrencies

Cryptocurrency has grown from a niche technology with a tech-savvy user base to an entirely new asset class that has attracted investment from mainstream institutions.

You’ll often see cryptocurrency criticized as a speculative asset, yet studies show that emerging markets in Africa, South America and Southeast Asia are increasingly using cryptocurrency as an actual currency. For example, one out of three respondents in Nigeria indicated they own or use cryptocurrency.

While much of the interest from North American and European investors are speculative, the steady growth in other markets demonstrates its practical use case for overcoming challenges with traditional fiat currencies. Additionally, next-generation cryptocurrencies like Ethereum and Cardano have enabled entirely new technologies with powerful use cases.

Now, mainstream investors are taking another look at cryptocurrency as a valuable asset class with blue-sky potential as adoption continues.

However, anyone investing in cryptocurrency should be well aware of the tax implications of investing in the asset class and transacting with it. Most countries have enacted some form of tax regulations similar to capital gains laws, which must be understood to avoid steep fines and other penalties.

How are cryptocurrencies taxed in the US?

The US was one of the first countries to enact cryptocurrency tax regulations, which closely mirror capital gains and income tax laws with specific taxable events. As a result, it’s well worth consulting the official IRS cryptocurrency FAQ for up-to-date information or to dive deeper into any of the below information.

Taxable crypto events include:

  • Selling cryptocurrency for any fiat currency (USD, CAD, EUR, etc.)
  • Purchasing any goods or service with a cryptocurrency, even small purchases, as it constitutes a selling event
  • Trading one cryptocurrency for another, which also includes purchasing NFTs
  • Sending someone cryptocurrency as a gift if the gift amount exceeds US$15,000 for the duration of the tax year

You’ll owe taxes on capital gains or losses realized from these events rather than the full amount of the assets. You’ll calculate the difference between the spot price you paid when the asset was acquired and the spot price when the asset was sold or swapped.

What are the tax rates for these events? To further complicate the matter, taxes fall into two categories:

  • Short-term capital gains: If you hold an asset for less than a year, you’ll be taxed at the same capital gains rate as your income tax bracket. Losses can offset income tax by up to US$3,000.
  • Long-term capital gains: If you hold an asset for over a year, the capital gains tax rate can be 0 percent, 15 percent or 20 percent, depending on your individual or combined marital income.

However, some cryptocurrency actions constitute income tax rather than capital gains. Income tax events include:

  • Receiving of cryptocurrencies from an airdrop event
  • Interest earned from staking or other DeFi lending
  • Income from cryptocurrency mining
  • Receiving cryptocurrency as a reward for work performed

Events in this category will be taxed in accordance with income tax regulations, which will vary based on if you’re a sole proprietor, an employee paid in cryptocurrency or a mining company paying yourself a regular salary.

How do you report cryptocurrency taxes?

How do you actually report your cryptocurrency taxes? First, you’ll need an in-depth report of all of your transactions with a taxable event during the year, which can be arduous and time-consuming depending on your activities. You’ll need to fill in Form 8949 and add it to Form Schedule D for capital gains tax purposes.

If you earned any crypto by way of income tax events, you’d need to add it to Schedule 1 Form 1040 or Schedule C, depending on the situation.

Fortunately, new services have emerged that handle the heavy lifting and provide you with ready-to-submit forms, although these services will have their own fees. Additionally, major services like Coinbase Global (NASDAQ:COIN) have integrated basic tax tracking and documentation.

What if you don’t report cryptocurrency in accordance with applicable regulations? You may be charged with tax evasion, which incurs penalties ranging from fines to incarceration.

How are cryptocurrencies taxed outside the US?

Investors outside of the US will generally face similar cryptocurrency tax regulations. The US set the standard for taxing this emerging asset class. Most governments have adapted the general guidelines to meet their own capital gains and income tax regulations.

For example, the Canada Revenue Agency (CRA) has provided a guidance document to help investors understand how to track and pay cryptocurrency-related taxes. The CRA views cryptocurrency as a commodity, treating it as either income or capital gains, depending on the circumstances.

The CRA’s guidance closely mirrors that of the IRS, with events like selling, swapping or transacting with cryptocurrency falling under capital gains, and events like mining and airdrops constituting income.

Every investor should carefully research tax laws within their own countries prior to investing. Researching applicable regulations ahead of time will help you track every transaction and pay the appropriate taxes. In addition, when considering taxes, you’ll also have a more accurate understanding of your actual profit or losses.

What about cryptocurrencies on a global scale? You’ll need to carefully consider any international trade laws and taxable events that may apply in addition to the specific cryptocurrency tax laws.

Lastly, it’s worth highlighting that the US and Canada, alongside other countries, do not tax simply holding cryptocurrency. Instead, the taxable events discussed above represent capital gains, losses or income. As a result, you can buy and hold your chosen cryptocurrency for as long as possible to accommodate taxes when you decide to sell.

What happens if you don’t report cryptocurrencies on taxes?

Understanding the various taxable events within your country is essential to investing in cryptocurrency. Failing to understand these laws will result in an inaccurate overview of your actual profits or losses from investments.

Failing to pay taxes as required can also result in heavy fines and penalties, including incarceration in the US, as it will be considered tax evasion. Therefore, avoiding the workload and costs of paying cryptocurrency taxes is not worth the risk.

Investing in cryptocurrency is an increasingly attractive option, but investors must understand taxes and regulations before exploring the emerging asset class.

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