Bitcoin and Taxes: Filing Correctly
It’s everyone’s “favorite” time of year again, to turn in your yearly gains to the IRS.
Unless you live in Malta or Puerto Rico or another similar country where cryptocurrency gains are not taxed at the moment, you’ll soon be trying to figure out how to properly account for your bitcoin or other cryptocurrency holdings ahead of the upcoming tax season and beyond.
Generally, ambiguity reigns presently, as cryptocurrency taxation is very much a work-in-progress for legislative bodies across the entire world. Nevertheless, as current cryptocurrency users, we must contend with the laws of our respective lands as they stand now, lest we commit tax offenses and cause significant headaches for ourselves down the road.
Bitcoin & Crypto Taxes
Today, then, we’ll be breaking down the taxation models applied to cryptocurrencies in some of the world’s most influential nations to help give you a better sense of the current international regulatory spectrum.
Please Note: This article is intended as a general guide to cryptocurrency taxation models around the world; it is not a substitute for professional advice. We recommend you take to speak to an accountant who is versed in crypto taxation in your jurisdiction.
The Three Main Taxation Models
Most nations make their crypto users submit to one of three fundamental taxation categories:
- Income tax
- Company tax
- Capital gains tax
Income tax applies to all non-incorporated entities that receive Bitcoin or other cryptocurrencies as income.
Company tax applies to enterprise-grade operations that are large and deal, accordingly, with vast amounts of crypto. Think of a cloud-mining company like Genesis Mining, for example.
Capital gains tax applies to traders who have invested in crypto speculatively with the express purpose of making gains. Most nations split capital gains taxes into short-term gains and long-term gains categories depending on various criteria.
Tell Me More About Capital Gains
The vast majority of crypto owners and traders will have to pay capital gains taxes on any gains from their crypto holdings. While crypto tax laws are still in their early stages, most countries have mature capital gains taxation schemes.
Calculating the cost basis of a stock trade is somewhat simpler than dealing with ‘cost basis’ for cryptos. While cryptos are regarded as something like a commodity for tax purposes, they are very similar to currency. That means that when one crypto is traded for another, the cost basis for both cryptos has to be established in the money of taxation.
For example, if you trade BTC for ETH, the value of both currencies at the time of the trade against the US dollar (for US taxpayers) would act as the cost basis for the trade.
If BTC=$4,000 and ETH=$140 than buying one ETH would establish a cost basis of $140, that figure would be necessary to record, as the BTC you traded would be taxed if you bought it for less than you sold it for. If and when you decide to trade the ETH that cost $140, that dollar figure acts as the basis for capital gains tax which would be levied.
When you trade your cryptos for fiat (or vice versa) the situation is easier because you are trading crypto against fiat, the cost basis will be calculated in the same currency you pay taxes with.
The takeaway from all this is that keeping accurate transactional records is extremely important.
In some ways, it may be easier to move in and out of fiat, or a fiat equivalent for tax purposes. Establishing a cost basis between two cryptos isn’t simple, and the transaction dates are extremely important for taxation.
Stablecoins could be a good fiat stand-in for tax purposes (at least for US taxpayers), as most of them are stable against the US dollar.
What is a Taxable Event?
In general, the most common taxable event will be the sale of cryptos at a profit. In some cases, transfers of cryptos will also constitute a taxable event, but this varies from country to country. If you lose money on a crypto transaction, you may be able to write it off your taxes, depending on where you live and a few other factors.
If you want to know more about how taxes could apply to your crypto trading or investments, it is a good idea to talk to a tax professional that has some knowledge about cryptos. Most nations impose strict penalties for non-payment of taxes, so if you owe the government money, get some advice before you owe them even more!
Now, let’s shift to specific national taxation approaches.
In the United States, the Internal Revenue Service (IRS) considers cryptocurrencies to be “property.”
In a legal sense, then, this means that your crypto investments will be subject to a capital gains tax—either a short-term capital gain rate or a long-term capital gain rate depending on how long you held your crypto before taking a profit.
If you cash your crypto out within one year of buying it, then you’ll be hit with the steeper short-term capital gains tax. These short-term rates are typically whatever your regular tax rate is, so if you’re taxed at 25%, then so, too, will your short-term gains be taxed at the same price.
For U.S. users who cash their crypto out after one year of holding it, they’ll contend with the long-term capital gains tax rates of 0%, 15%, and 20% depending on their tax bracket.
And the Cryptocurrency Fairness in Taxation Act (CFTA) is also currently being debated in the U.S. Congress; this will would exempt all crypto transactions beneath $600 from taxation.
There was some debate about whether Crypto to Crypto trades would be treated as “like-kind,” meaning no tax would be due on these. This has now been clarified, and tax is due, so you will need to keep records of any trades you make and pay tax accordingly.
A Company called CryptoTaxPrep offer a complete Cryptocurrency tax service which costs $750 for a state and federal tax return.
Learn More at The Simple Dollar