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Cryptocurrency taxes or How much you will pay the government for a Bitcoin?
The issue of the taxation of cryptocurrencies is discussed for a long time. But the thing is, what actually cryptocurrency tax must be taken? Let’s look at examples of countries where actively trading cryptocurrency.
In America, bitcoin is considered as property, because the profit is generated from capital gains and not from differences in exchange rates. The rules of taxation government was installed in 2020.В Since 1th of January 2020, according to the law on tax reform, which was signed by the President of the United States Donald trump, every operation with cryptocurrency becomes a subject of taxation. Owners of digital coins needed to pay taxes to notify the IRS (Internal Revenue Service) on current transactions with cryptocurrency.
If you are a miner, then you have to pay tax on gross income for Р° year, of course, if it was. And those who receive cryptocurrency for goods/services are required to include the cost of cryptocurrency into the declaration, taking into account the exchange rate on the day of its receiption.В Even exchanging one cryptocurrency for another, the owner will be taxed during surgery. Moreover, coins are subject to income tax in the range of 10%-37%, depending on income level. And all those who owns a crypt for more than one year, must pay long-term tax on capital gains at 24%.
In Canada, payment for cryptocurrency goods and services will be considered a barter transaction and will be taxed accordingly. Cryptocurrency in this country is essentially equal to the product, from which the owner of the crypto currency will pay a tax on capital gains or on income entirely. Here everything will depend on how this profit was formed. Even wages in bitcoin will be taxed.В Income tax will be paid also for commercial mining (but as far as the commercial purposes of miners are concerned, it will be subject to clarification on a case-by-case basis).
Singapore was the first who began to resolve issues with taxation of cryptocurrency. As a result, in 2020, according to IRAS tax office of Singapore, profit from the sale of crypto – coin is not taxed, since cryptocurrency is a digital asset and is included in the investment portfolio, where profit is capital gains. But, if cryptocurrency trading is considered a core activity, then profits will be subject to corporate tax. To dealers the tax applies to goods/services, making the coins not recognized as money, and services. It is important to know the fact that transactions through cryptocurrency exchanges are not subject to taxation. InВ taxation of cryptocurrencies, all nuances will be taken into account. For example, what goods are paid (real or virtual), who trades in the crypto (directly trader or broker), etc.
For today, this country has not yet developed specific rules on taxation of cryptocurrency traders. Everything is quite simple, the market Chinese traders pay income tax, income tax and capital gains. In addition, the sale of coins may be subject to VAT (value added tax). A small note: China is taking measures to gradually ban mining in the country due to the consumption of too much electricity and the speculative nature of the virtual currency.
Since April 1 2020, the government of Japan has officially recognized the cryptocurrency as a legal tender and a full-fledged currency. The goal was to make cryptocurrency trading cryptocurrency unhindered, thereby providing traders with easy access to it without such external factors as taxes. After all, earlier taxes were levied on income for cryptocurrency, namely: sales tax – 8%, profit tax and income tax.
The European Union (EU) considers cryptocurrency not as property, but as a currency. From what the owners will be subject to income tax and tax on capital gains, but not a tax on the additional cost. But we must not forget the fact that in different countries of the EU and taxation is different.
For example, Germany, like Р° Finland, imposes on cryptocurrency owners taxes on capital gains and “wealth”. The UK, in turn, does not collect tax on additional value from miners and for the exchange of cryptocurrency for pounds sterling, but the sale of goods/services for the crypto currency will be taxed, and the state collects corporate and income taxes, as well as capital gains tax.
The official status of the cryptocurrency and the procedure of its taxation are on the stage of determination in the post-soviet expanses.
Government of the Russian Federation and the Central Bank (CB) are working on the development of a regulatory legal act that will regulate the legal status of the cryptocurrency and the order of its circulation. Previously, the Federal financial monitoring service and the Central Bank often raises the question of the inclusion of cryptocurrency transactions classified as “doubtful,” citing the law “about counteraction to legalization (laundering) of incomes obtained in a criminal way and financing of terrorism”. As a result, already in October 2020, the Ministry of Finance, for tax purposes, proposed to introduce the registration of miners as individual entrepreneurs, as well as legal entities.So far, all this, in fact, at the stage of proposals and adjustments, and for implementation in practice, requires the introduction of a number of amendments in the budget and tax legislation of the country.
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Ukraine collects the tax from physical persons who receive income in the form of cryptocurrency, whereas legal entities income tax. In General, there are no special tax rules.
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The 2020 Guide To Cryptocurrency Taxes
Cryptocurrency tax policies are confusing people around the world. This guide breaks down specific crypto tax implications within the U.S., but similar issues arise in many other countries.
Cryptocurrencies like Bitcoin have gained significant popularity over the past few years and into 2020. This rise in popularity is causing governments to pay closer attention to the asset. Recently, we’ve seen the IRS release new cryptocurrency tax guidance and start sending thousands of warning letters to non-compliant cryptocurrency investors. The question everyone is asking: How is cryptocurrency handled for tax purposes?
Crypto Taxes – The Fundamentals
According to official IRS guidance, Bitcoin and other cryptocurrencies should be treated as property for tax purposesвЂЉвЂ”вЂЉnot as currency. This is true for all cryptocurrencies such as Ethereum, Litecoin, XRP, etc.
This means that crypto must be treated like owning other forms of property such as stocks, gold, or real-estate. Just like you would with trading stocks then, you are required to report your capital gains and losses from your cryptocurrency trades on your taxes. Failing to do so is considered tax fraud in the eyes of the IRS.
How Do You Calculate Your Crypto CapitalВ Gains/ Capital Losses?
Calculating capital gains and losses for your cryptocurrency trades is relatively straightforward, and we walk through the process below. However before doing the calculations, you need to understand taxable events.
Taxable Events for Cryptocurrency
A taxable event is simply a specific action that triggers a tax reporting liability. In other words, whenever one of these ‘taxable events’ happens, you trigger a capital gain or capital loss that needs to be reported on your tax return. It’s as simple as that. The following have been taken from theВ official IRS guidance from 2020В as to what is considered a taxable event in the world of crypto. If any of the below scenarios apply to you, you have a tax reporting requirement.
- Trading cryptocurrency to fiat currency like the US dollar is a taxable event
- Trading cryptocurrency to cryptocurrency is a taxable eventВ (you have to calculate the fair market value in USD at the time of the trade)
- Using cryptocurrency for goods and services is a taxable eventВ (again, you have to calculate the fair market value in USD at the time of the trade)
- Earning cryptocurrency as income is a taxable event (from mining or other forms of earned cryptocurrency)вЂЌ
What is Not Considered a Taxable Event?вЂЌ
- Giving cryptocurrency as a gift is not a taxable eventВ
- A transfer is not a taxable eventВ (you can transfer crypto between exchanges or wallets without realizing capital gains and losses)
- Buying cryptocurrency with USD is not a taxable eventВ (you donвЂ™t realize gains until you trade, use, or sell your crypto)
If any of this is confusing to you, don’t worry. We will walk through examples of these scenarios below.
Step 1вЂЉ вЂ”вЂЉDetermineВ Your Cost Basis
Now that it is clearВ whenВ you must report your crypto transactions, itвЂ™s important to understand the exact process behind doing so.
The first step is to determine the cost basis of your holdings.
Essentially, cost basis is how much money you put into purchasing your property. For crypto assets, it includes the purchase price plus all other costs associated with purchasing the cryptocurrency. Other costs typically include things like transaction fees and brokerage commissions from the exchanges you purchase crypto from. So to calculate your cost basis you would do the following:
(Purchase Price of Crypto + Other fees) / Quantity of Holding = Cost Basis
For example, if you invested $500 in Litecoin back in November of 2020, that would have bought you about 5.1 Litecoin. LetвЂ™s say you also paid Coinbase or Binance a 1.49% transaction fee on the purchase. Your cost basis would be calculated as such:
($500.00 + 1.49%*500)/5.1 = $99.50 per Litecoin
Step 2 вЂЉвЂ”вЂЉSubtract Cost Basis from Fair Market Value
The second step in determining your capital gain or loss is to merely subtract your cost basis from the sale price of your cryptocurrency. Sale price is also often referred to as the Fair Market Value. The equation below shows how to arrive at your capital gain or loss.
Fair Market Value – вЂЉCost Basis = Capital Gain/Loss
As an example, letвЂ™s say you sold exactly one Litecoin a month later because the price had doubled to $200 per coin. This would be considered a taxable event (trading crypto to FIAT currency) and you would calculate the gain as follows:
200вЂ“99.50 = $100.50 Capital Gain
$200 is the Fair Market Value in US Dollar at the time of the trade. $99.50 is your cost basis in the asset.
You then owe a percentage of this $100.50 gain to the government on your taxes.
What if I Lost Money Trading Crypto?
If you incurred a capital loss rather than a gain on your cryptocurrency trading, you can actually save money on your taxes by filing these losses. Many investors even strategically sell crypto assets which they have losses in to reduce their tax liability at the end of the year. This strategy is commonly referred to as Tax Loss Harvesting. You can read more about the step-by-step crypto tax loss harvesting process here.
Determining Fair MarketВ Value
This simple capital gains calculation gets more complicated when you consider a crypto-to-crypto trade scenario (remember this also triggers a taxable event). LetвЂ™s look at another example to gain understanding of how fair market value ties in.
LetвЂ™s say you purchase $100 worth of Bitcoin including transaction and brokerage fees. That $100 currently buys about 0.01 Bitcoin. Now letвЂ™s say two months later you trade all of your 0.1 Bitcoin for 0.16 Ether.
How would you calculate your capital gains for this coin-to-coin trade? It all depends on what the Fair Market Value of Bitcoin was at the time of the trade.
LetвЂ™s say at the time of the trade, 0.01 Bitcoin was worth $160. This would make the Fair Market Value of 0.01 Bitcoin $160. You would then be able to calculate your capital gains based of this information:
160вЂ“100 = $60.00 capital gain
For that crypto-to-crypto trade, you would owe the government a percentage of your $60.00 gain.
The Challenge for Traders
This calculation and concept of Fair Market Value sparks a large variety of problems for crypto traders. Some traders have been trading crypto for months, possibly years, and havenвЂ™t been keeping track of the dollar value or Fair Market Value of their crypto at the time they traded it. It’s also not easy to keep track of USDВ values for most trades as they are mostly quoted in other cryptocurrency values, not in USD.
This Fair Market Value information is needed for traders to accurately file their taxes and avoid problems with the IRS. Depending on the volume of trades they have carried out, calculating gains could become extremely tedious, and potentially impossible to do by hand if you havenвЂ™t been keeping track of Fair Market Value. Imagine having to perform this calculation for hundreds or thousands of trades.
Because of this challenge, a lot of cryptocurrency users are turning to crypto tax software to automate the entire tax reporting process.
How Do I Actually File My Crypto Taxes?
To properly file and report your crypto transactions, you need IRSВ form 8949 and 1040 Schedule D.
List all cryptocurrency trades and sells onto Form 8949 (pictured below) along with the date you acquired the crypto, the date sold or traded, your proceeds (Fair Market Value), your cost basis, and your gain or loss. Once you have each trade listed, total them up at the bottom, and transfer this amount to your 1040 Schedule D. Include both of these forms with your yearly tax return.
For a detailed walkthrough of the reporting process, please review our article on how to report cryptocurrency on your taxes.
Short-Term vs. Long-Term CapitalВ Gains:
One thing that has yet to be touched on is the actual rate of your capital gains tax. That is because this rate is dependent upon a number of factors. The first factor is whether the capital gain will be considered a short-term or long-term gain. The most common rate in the world of cryptocurrency is the short-term capital gain which occurs when you hold a cryptocurrency for less than a year and sell the cryptocurrency at more than your cost basis.
Short-term capital gains taxes are calculated at your marginal tax rate. Below is a table that depicts the different tax brackets that you may fall under:
To demonstrate how to navigate the marginal tax brackets, suppose youвЂ™re a single filer. You made $85,025 during the tax year, and you purchased Bitcoin six months ago for $5,000 including fees and commissions. Yesterday, you sold Bitcoin for $6,000, a gain of $1,000.
The $1000 raises your income to $86,025 for the year. Based on the marginal tax rate table, the first $500 of your gain is taxed at the 22% rate, generating $110 in taxes. The remaining $500 is taxed at 24% as it exceeds the $85,525 threshold. This generates $120 in taxes. In total, the $1000 capital gain would generate $230 in taxes for the year. This is the amount that you owe the government.
Long-Term CapitalВ Gains:
For all of the holdersВ out there, if you held your cryptocurrency for a year or more, you qualify for a lower long-term capital gains rate. The table below details the tax brackets for long term capital gains:
As you can see, the long-term rate is much lower and rewards investors if they hold, continuously, for a year or more.
If you mine cryptocurrency, you will incur two separate taxable events. The first is as income from the USD value of the coins you mined, and the secondВ is the capital gain or loss you incur when you sell or trade your mined coins.
You report this income differently depending on whether or not you minedВ the crypto as a hobby or as a business entity.
Crypto Loans, Margin Trading, and DeFi
Cryptocurrency lending platforms and other DeFi services have exploded in popularity within the crypto landscape. Receiving interest income from a crypto loan or similar service is treated as a form of taxable incomeвЂ”similar to mining or staking rewards. This type of income should be reported under the вЂњother incomeвЂќ section of line 21 of Schedule 1 вЂ” Additional Income and Adjustments to Income вЂ” as part of your income tax return.
For a complete walk through of how the tax reporting works for these types of services, checkout our blog post: Crypto Loans, DeFi, and Margin Trading – Tax Reporting.
Why Can’t My Cryptocurrency Exchanges Provide Me With Accurate Tax Reports?
This is where the big problem exists.
Because users are constantly transferring crypto into and out of exchanges, the exchange has no way of knowing how, when, where, or at what cost basis you originally acquired your cryptocurrencies. It only sees that they appear in your account.В
The second you transfer crypto into or out of an exchange, that exchange loses the ability to give you an accurate report detailing the cost basis and fair market value of your cryptocurrencies, both of which are mandatory components for tax reporting.
As you can see pictured below, Coinbase themselves explains to their users how their generated tax reports wonвЂ™t be accurate if any of the below scenarios took place. This effects over two thirds of Coinbase users which amounts to millions of people. You can read more about the cryptocurrency tax problem here.
1099 Information Reporting
Another side effect of the “cryptocurrency tax problem” is that cryptocurrency exchanges struggle to give accurate and useful 1099’s to their users. 1099’s of all types serve the same general purpose: to provide information to the Internal Revenue Service (IRS) about certain types of income from non-employment-related sources.
Many exchanges have decided to issue 1099-K because the industry leader, Coinbase, issues this form to users who meet certain thresholds. Unfortunately, this form is completely useless for taxpayers who are trying to report their cryptocurrency gains and losses. We go into detail on this 1099-K problem within our blog post: What to do with your 1099-K.
The solution to the “cryptocurrency tax problem” hinges on aggregating all of your cryptocurrency data making up your buys, sells, trades, air drops, forks, mined coins, exchanges, swaps, and received cryptocurrencies into one platform so that you can build out an accurate tax profile containing all necessary data.
Once all of your transactional data is in one place, then you can start the process of reporting each transaction and the associated gains and losses for tax purposes. Of course you can do this by hand, but you can also use crypto tax software to automate the entire process.
Crypto Tax Software
CryptoTrader.TaxВ is software built for cryptocurrency tradersВ to solve theВ tax reporting problem. It allows cryptocurrency users to aggregate all of their historical trading data by integrating their exchanges and making it easy to bring everything into one platform. Once the historical data is in the system, the tax engine auto-generates all of the necessary tax reports for cryptocurrency traders to fileВ like the 8949. In addition to the DIY tool, CryptoTrader.Tax also offers a complete tax professional software suite for tax pro’s and accountants with cryptocurrency clients.
Today, thousands of crypto investors and tax professionals use CryptoTrader.Tax to securely and automatically build out their requiredВ cryptocurrency tax reports. Users can take these generated reports to their own tax professionals, or they can simply upload them into tax software likeВ TurboTax or TaxAct.
As of January 2020, the CryptoTrader.Tax team partnered up with IntuitвЂ™s TurboTax to make the filing process seamless and fast for traders.
What Happens if I DonвЂ™t Pay My CryptoВ Taxes?
A lot of traders are convinced that because of the anonymous, decentralized nature of Blockchain and crypto transactions, that there is no way for the government to see or know that they are making money trading/buying/selling cryptocurrency. This is not true.
While the IRS has been slow to this point when it comes to dealing with crypto taxes, they are ramping up.В The IRS win against Coinbase, which required the popular exchange to turn over records for individuals who have $20,000 or more in any transaction (buy/sell/ or receive), is the beginning.
The Blockchain is a distributed publicВ ledger, meaning anyone can view the ledger at anytime. Figuring out an individualвЂ™s activities on that ledger essentially comes down to associating a wallet address with a name. Choosing not to report your crypto transactions is a risky decision that exposes you to tax fraud to which the IRS can enforce a number of penalties, including criminal prosecution, five years in prison, along with a fine of up to $250,000.
Disclaimer – This postВ is for informationalВ purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.
Crypto and bitcoin taxes in the US
Did you sell, use, or convert crypto? If so, you may owe taxes if you’re a US taxpayer. Here’s a look at what that could mean, the steps you may have to take, what forms you’ll need, and how gains and losses might affect your taxes.
First, let’s get this out of the way.
Coinbase doesn’t provide tax advice. We put this guide together for informational purposes only and it shouldn’t be considered tax advice or an individualized recommendation. Please consult a tax-planning professional regarding your personal tax circumstances.
The million- dollar crypto question
1.1 Do I have to pay crypto taxes?
At Coinbase, we see crypto as the foundation for tomorrow’s open financial system — but it’s also a part of today’s traditional one. To answer the many questions on crypto and taxes, the IRS has issued crypto tax guidance.
In previous tax seasons, we received a lot of questions from crypto newbies and experienced customers alike. We get it — paying bitcoin taxes and other crypto taxes can be confusing. While we can’t give tax advice, we want to make crypto easier to buy, sell, and use. This guide is our way of helping you better understand your 2020 crypto tax obligations.
There’s a lot of conflicting content out there, but make no mistake: you are required to report gains and losses on each cryptocurrency transaction or when you earn cryptocurrency, even if there is no gain or loss or the gain or loss is not material. The IRS holds you responsible for reporting all income and transactions whether you receive a tax form from a crypto exchange or not. Exchanges like Coinbase provide transaction history to every customer, but only customers meeting certain mandated thresholds will also receive an IRS Form 1099-K.
One quick note if you’re a non-US investor: crypto taxes are treated differently country-to-country. This guide only covers the US. Unless you happen to have some US tax obligations (this is rare) be sure to consult your local country tax advisor to confirm your tax reporting obligations at your home jurisdiction.
In a nutshell.
All crypto sells, conversions, payments, donations, and earned income are reportable by US taxpayers
The reason that buying and selling crypto is taxable is because the IRS identifies crypto as property, not currency. As a result, tax rules that apply to property (but not real estate tax rules) transactions, like selling collectible coins or vintage cars that can appreciate in value, also apply to bitcoin, ethereum, and other cryptocurrencies.
To no one’s surprise, the IRS isn’t kidding around. Failure to report income, including income from the sale of crypto, could result in interest on unpaid taxes and penalties. Please consult with a tax-planning professional regarding your individual reporting obligations.
With all that in mind, here’s our list of five steps you can take to help you understand if you may need to pay crypto taxes, how to determine the amount, and what forms you may need. Let’s dive in.
Steps to take
2.1 Determine if you owe crypto taxes
Even if you’re in the “Just HODL it” camp, it’s worth evaluating your crypto transactions to determine if you may owe taxes.
In short, a lot. Here are some examples of taxable crypto events:
Selling crypto for cash
In other words, realizing the gain on your crypto property (don’t forget losses could help with your tax bill)
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