Cryptocurrency regulation has resulted in tighter tax requirements for cryptocurrency. We clear up some basics regarding what should be reported and what not to do when reporting your cryptocurrency dealings.
The popularity of cryptocurrency has increased significantly in the past few years. As a result, the attention of governments and regulatory bodies has also increased. Key questions resulting from this newfound interest are “Is cryptocurrency taxed?” and “How do I report my cryptocurrency gains?”.
In this blog, we will share some basic information concerning crypto taxation and what to watch out for when reporting your cryptocurrency activity.
Disclaimer: This post is for informational purposes only and should not be viewed as a tax, legal, or investment advice. Cryptocurrency regulation is evolving rapidly and different jurisdictions might have different rules. We advise you to talk to a tax expert about how to report your cryptocurrency dealings.
Before we start
Cryptocurrency taxation can vary from country to country and sometimes between jurisdictions so consider the below text as a generalization across the practices known to us at the moment of writing. It is a good idea to address any questions to a tax professional who can help you with reporting your cryptocurrency dealings. Corporate users may have different tax obligations to individuals so consider that if you are operating with cryptocurrencies as a business entity.
General tax principles apply to cryptocurrency transactions and exchanges. Like with stocks or bonds, gains and losses from sale or exchange of cryptocurrencies are usually taxed as a capital gain or loss. Buying cryptocurrency is not a taxable event. The sale or exchange, however, is a taxable event that you should report. In most cases, this will result in some form of income tax.
Short-term and long-term gains
If a cryptocurrency is held for less than a year before selling or exchanging, a short term capital gains tax applies. In most cases, this is equal to the ordinary income tax rate for an individual user. Long term capital gains tax applies when a cryptocurrency is held for more than a year before selling or exchanging. As far as we are aware, this rule holds for US residents.
Some jurisdictions also view taxation through the prism of periodic or prolonged activity. For example a day-trader’s capital gains might be taxed differently to a long time holder’s gains. One could be considered a for-profit activity and the other could be considered an investment with a lower tax bracket. In some respect this is analogous to the long and short term distinction but we definitely recommend proper research for your own jurisdiction before cashing out.
If you are a frequent trader and/or if you are doing arbitrage, make sure to include all your trades from all your exchanges.
Companies trading in cryptocurrencies should consult professionals regarding their tax obligations.
Gains and losses
Any sale or exchange can incur a gain or a loss. Both should be reported as taxable events as tax authorities usually have no way of knowing whether a sale or exchange resulted in a gain or a loss. Some losses can be used to decrease your tax liability. Investment or capital losses can occur when the selling of an asset occurs at a lower price than it was bought at. It is not clear whether ICO scams or Exchange shutdowns count as an investment loss. US legislation currently allows $3,000 of net capital losses to be deductible in any given year. Larger losses carry over to future years.
Mining, Forks and Air Drops*
Generally speaking, mined cryptocurrency counts as taxable income. It is included in the gross income and the tax is based on the market value of the coins at the time they were received.
Hard forks that result in the creation of a new cryptocurrency are also regarded as ordinary income and are taxed based on their value at the time they were received. The case is similar to airdrops so be aware that you should report all proceeds from mining, hard forks and airdrops as income.
Other taxable events
Cryptocurrency users should be aware that selling and exchanging are not the only taxable events. Many jurisdictions may count gifting and buying with cryptocurrency as taxable events that, depending on the holding period, can result in a form of tax obligation. Receiving payroll in cryptocurrency is not uncommon and is usually considered as taxable income. Companies accepting cryptocurrencies as a payment method should also make sure to follow the applicable regulation and report their proceeds accordingly.
Stolen or lost cryptocurrency
US legislation recognizes Casualty, Theft and Investment losses. The former two do not qualify for tax deductions but we will break them down here. Casualty loss means a loss resulting from losing access to funds or sending them to a wrong address where they cannot be recovered. This is usually considered a loss from negligence and can’t be deducted from your tax obligation as a loss. Theft most often results from hacks on exchanges or hacks and thefts from native addresses. This case is also unlikely to be deductible as a loss.
We discussed investment losses above under Gains and Losses.
Decreasing your tax liability
Tax loss harvesting is when you sell an asset that has decreased in value to reduce your net gain. This is not illegal and can be used to offset your gains up to $3.000 in a given year in the US. Long term gains tax rate is usually lower than short term gains rate so holding on to your investments for longer periods can decrease your tax liability. Gifting cryptocurrency can reduce your tax liability but keep in mind that the receiver will have to pay capital gains tax for the gift and that gifting does not count towards a loss. Hiring an accountant that also specializes in cryptocurrency to help you minimize your tax liability can reduce your tax-related expenses in the long term. Lastly, utilizing software that specializes in identifying your actual tax obligations automatically can save you time and money.
Failure to properly report cryptocurrency transactions may lead to fines significantly bigger than the tax that should be paid. We strongly recommend keeping a detailed history of all your cryptocurrency dealings, report them on time and discuss taxation and reports with a tax professional that can help you with reporting in your jurisdiction.
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If a cryptocurrency is held for less than a year before selling or exchanging, a short term capital gains tax applies.