If you’ve used cryptocurrency for any reason this past year, you may find getting your taxes done is a bit of a tricky process. There are several reasons why it’s such a challenge to figure out what you may owe. This article will prvide some understanding for all cryptocurrency investors, traders
In the US and Canada, officials have designated cryptocurrencies as property, which is subject to capital gains taxes on any realized profits. If you bought Bitcoin in early 2017 and then sold in December of that same year, you would have made a handsome profit. But, until you cash out the crypto to take profit, most capital gains taxes won’t apply. One exception is if you are making crypto dividends, which allows you to stake your coins to earn interest. These are treated similarly to your interest earning bank savings account and must be reported, usually if over a certain amount per year.
Many crypto users have found that the task of figuring out capital gains and losses is not as easy as it may sound. Many others feel that crypto to crypto transactions should not be considered and taxed in the same way as stock trades.
How is cryptocurrency taxed by governments?
Regardless of how we all feel governments should treat digital assets, the US and many other countries have ruled that cryptocurrencies, no matter whether they are security tokens, stable coins or utility tokens, are the same as capital assets, or real property. Essentially, crypto trades (crypto-to-crypto or crypto-to-fiat) fall into the same category as stock trades. But these digital assets are very different from stocks for many reasons, including:
- It’s harder to profit on traditional stock exchanges – it’s costlier, slower, plus you need capital to start out for margin and trading fees. With crypto, you can start trading with less than €100 (~$115).
- Because of the high level of regulations on traditional trading venues, there’s a lot of paperwork required when initiating trades. Crypto traders can begin trading immediately and even trade completely privately (anonymously) if they so choose.
- The time frame when you can make trades on traditional exchanges is restrictive in light of the 24/7 availability of crypto exchanges.
- Stock exchanges have to buy stock insurance, not so with crypto exchanges. There are no safety nets yet with
crypto,unless you consider crypto to be safety net itself.
- You store your own assets with cryptocurrencies (or you should!), whereas with traditional trading, a 3rd party holds your assets.
- The mainstream media publishes stock prices, volume, etc. daily in national publications. On the other hand, there is not one mention of cryptocurrency in today’s WSJ.
- Stock exchanges must report your capital gains. Cryptocurrency exchanges are not. This may be changing.
It doesn’t matter that in many cases, cryptocurrencies take on the attributes of actual currencies. The law in most countries still states that they are property.
What do crypto investors and traders need to do?
Until cryptocurrency regulations (or even better,
You might have bought some crypto in 2018, had an employer pay you in crypto for work, accepted payment in crypto, or paid a freelancer in crypto. Alternatively, you may be an active crypto trader, with tons of crypto to crypto transactions. Just the thought of figuring out capital gains on all that activity can make someone queasy.
As an individual investor, you are on your own as far as reporting, but there are different types of crypto tax software to help you. There’s no one 3rd party, as you have in stock trades, automatically keeping track of it all and preparing corresponding reports. Even though Coinbase does issue 1099-K’s, they only do so for investors who received at least $20,000 in gains with over 200 transactions. (This policy can vary state by state, and Coinbase says it will be updating its tax info in January of 2019).
What are crypto investors required to report?
US and Canadian investors must report all capital gains on every crypto transaction, whether it’s crypto to fiat or crypto to crypto. Additionally, if you take in
Do crypto exchanges do the reporting for me?
As mentioned above, some exchanges are starting to do some reporting. But as it is, they don’t have to calculate your cost basis, gains, losses or capital gains taxes.
You may have heard about the Coinbase case, where the IRS became suspicious when less than 1000 taxpayers reported capital gains. Even though Coinbase at the time had almost six million users! In response to their doubts, the IRS issued a John Doe summons trying to force Coinbase to fork over all user identity and transactional data.
At first, Coinbase managed to avoid the summons so the IRS narrowed down its request for information to those users with more than $20,000 in transaction volume during any one year. They basically wanted the users’ taxpayer ID, name, birthdate and address, in addition to all their trade records. Eventually, Coinbase did comply, giving the IRS all this data on 13,000 of it’s traders.
But as of yet, there are no set rules for crypto exchanges. If they are located in the US, they can expect a similar summons if a situation like the one with Coinbase reoccurs.
The real challenge with cryptocurrency exchanges is that because they are part of the decentralized universe, they are located all over the globe. Users from anywhere can sign up and start trading on most of them. While they operate on a global scale, taxpayers in each region have to stay legal according to their own country’s rules and regulations (if there are any yet). Furthermore, more and more exchanges and platforms are decentralized, meaning transactions happen with no centralized party running the protocol.
How do crypto investors and traders report their capital gains?
For the time being, non-institutional crypto traders have 4 basic options for tax reporting:
1. Personally calculate all capital gains
The first option involves personally calculating and reporting all capital gains (if you had any this year!) stemming from every move your cryptos made in 2018. For this option, you’d want to create your own spreadsheet and enter in all your trade information, including:
- When you bought the digital asset
- How much you paid for it
- When you sold it
- What did you receive in return
You’ll also need to understand the
When you trade that asset for another crypto or sell the coin for fiat, the price of the coin at the time you trade or sell helps you determine the capital gain (or loss). If the coin is worth more at the time of the trade than when you bought it, you have a gain. If it’s worth less, you have a loss.
All of these gains and losses can be tracked, and if you have more losses than gains, you can deduct the loss. If you have more gains, you’re required to pay capital gains tax.
2. Go rambo style and skip reporting
There are several aspects to this method. For one, you go against the law and risk an IRS audit if in the US, which is a harrowing experience. But essentially, it’s tax evasion which is a federal crime. If you get caught, at the very least you may owe back taxes, interest and fees. At the very worst, you might owe $250,000 and find yourself in jail.
Even though the IRS is vastly understaffed and underfunded, their main policy for compliance is scapegoating high profile cases. That’s historically how they get the word out that they mean business on a particular ruling. Cryptocurrency is likely to come under fire and be “watched” following a year of ICO scams and fraud. At the moment, however, the US Government is shut down. Still, the risk is probably not worth it.
3. Try out a new crypto tax service
There are several crypto tax services that have popped up and two or them, Bitcoin.Tax and CoinTracking, are looking like viable options.
With Bitcoin.Tax, you pay between $154 and $200 annually to have them do all your reporting. Of course you do have to enter all your trade information as you go. They currently offer this service on 2000 different cryptocurrencies. The video below will help you get started:
The second option, CoinTracking, has a great live demo going that you can actually use to calculate everything and get reports as well. Their user interface is very intuitive and you have the choice to manually enter the data yourself or utilize their wallet and exchange import features.
Here’s what entering a trade looks like on their live demo:
4. Find a crypto savvy tax professional
It’s often suggested that individual investors who need help in calculating their gains and losses “see their accountant or tax professional.” However, most tax pros have little to no experience dealing with cryptocurrencies. But there definitely are some crypto savvy tax pros, it just takes a little bit of looking.
If you live in the US, Canada, Europe, Australia, the Middle East or Africa, you can check the Bitcoin Tax guide to find tax professionals in your area. Not all states and regions within these locations have listings at this time. But we’ll probably see more tax experts added in as crypto becomes more globally adopted.
Buying crypto is not a taxable event, but selling crypto and trading crypto are taxable events.
Crypto tax requirements for miners
Miners of bitcoin and other cryptos earn coin as they mine. Thus, it’s treated the same way as if they are being paid a salary and it’s reported as self employment income. The double whammy comes when they cash it out or trade it for another crypto. Here, they need to report their gains and losses the same way as individual investors.
Since mining is their business, they may be able to deduct much of the computer equipment costs and utility bills associated with their work.
What if I bought something with crypto in 2018?
At this moment in time, if you’re in the US and you buy something using cryptocurrency, then that is considered a “realization event”. In other words, it’s the same as if you made crypto to crypto trade or cashed out.
Let’s say you purchased a website domain and it cost 1 Bitcoin. When you originally bought that Bitcoin, it cost $5000. The day you buy the domain name, you create a taxable event. At the time of purchase of that domain, say Bitcoin was $5500, so your capital gain is $500. Now you owe a capital gains tax on that $500.
It’s the other way around if Bitcoin is worth less on the day you bought the domain. Maybe it tanked to $4000. Then you have a $1000 loss that can be deducted.
Fun Fact: If you have crypto losses, you can use them to offset capital gains, not just on crypto capital gains, but gains on stocks and other assets as well.
When you spend cryptocurrency, it’s the same as if you made a trade.
Find out more
Below you can find the tax agencies for six countries where cryptos are taxed. Check out the links for additional information and updates as cryptocurrency regulations evolve in each region.
- Canada: https://www.canada.ca/en/revenue-agency/news/newsroom/fact-sheets/fact-sheets-2015/what-you-should-know-about-digital-currency.html
- UK: https://www.gov.uk/government/publications/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies
- Germany: https://www.bundesfinanzministerium.de/Content/DE/Downloads/BMF_Schreiben/Steuerarten/Umsatzsteuer/Umsatzsteuer-Anwendungserlass/2018-02-27-umsatzsteuerliche-behandlung-von-bitcoin-und-anderen-sog-virtuellen-waehrungen.html
- Australia: https://www.ato.gov.au/business/gst/in-detail/your-industry/financial-services-and-insurance/gst-and-digital-currency/
If you reside in any of the countries listed below, you can check the Library of Congress Report for crypto tax information. Be advised that this report was published in June 2018 and folks may want to check their own governmental resources or a local tax advisor for any updates to this information.
If you live in El Salvador, Bitcoin has recently been elevated to a National Currency, and capital gains taxes no longer apply for residents who spend, trade, cash out or earn on their Bitcoin.
If you are a dedicated HODL-er, you have nothing to worry about. Those that held on to their crypto and did not trade for other coins or exchange for fiat will have no capital gains taxes on their digital assets.
A bit of “good” news is that many crypto traders have experience a capital gains loss. Maybe that doesn’t sound like good news, but at least they won’t have to pay any capital gains tax. Plus, they should be able to deduct their losses.
Disclaimer: This is not tax advice. Please do your own due diligence!