23.12.2019 -

Bitcoin Tax: a Complete guide

Despite uncertainties around the price of Bitcoin, complicated legislation, and different approaches to the cryptocurrencies worldwide, the crypto market keeps attracting investors. However, not everyone knows that cryptocurrencies are a subject of taxes. Have you heard about that? If not, read this guide that will disclose hidden stones.

Cryptocurrency taxation sounds confusing as taxes symbolize a regulation imposed by a central government while crypto assets and blockchain technology are associated with decentralization. Nevertheless, cryptocurrencies have been spreading worldwide. Some of them even became a part of the state policy (e.g., Venezuelan Petro). That’s why it’s not surprising that countries are looking for ways to control them. One of such methods is to make cryptocurrencies a subject of taxation. Taxes cover different aspects of the cryptocurrency market. They are trading, mining, loans, margin trading, and decentralized finance. In this article, we will talk about cryptocurrency trading and its taxation.

For many countries, tax legislation is still an issue to solve. However, some have already succeeded: The United States, many European and Asian countries are among them. Let’s take a closer look at the major principles of Bitcoin taxes.

Bitcoin Taxes in the US

The first tax guidance was issued in 2014 but it didn’t cover many issues. In October 2019, the Internal Revenue Service (IRS) released a cryptocurrency FAQ and an official 2019-24 Revenue Ruling.

It seems strange that you should pay taxes for cryptocurrencies. However, the Internal Revenue Service considers crypto assets as property. This means that you have to report your capital gains and losses the same as you do for your stock, real estate or any other owned property.

That’s why it’s worth making yourself comfortable and learn how to make tax reports.

The first step is to determine either the event is taxable or not. According to the IRS guidance, the following events require you to report on cryptocurrency gains/losses:

· If you trade a cryptocurrency to a fiat currency like the USD;

· If you trade a cryptocurrency to a cryptocurrency (calculate the fair market price in the USD at the time of the trade);

· If you use a cryptocurrency for goods and services (calculate the fair market price in the USD at the time of the trade);

· If you earn cryptocurrency as an income (mining or wage income) ‍.

‍At the same time, there are events that exclude tax payments.  

· If you give a cryptocurrency as a gift;

· If you transfer a cryptocurrency between exchanges or wallets without experiencing capital gains/losses;

· If you buy a cryptocurrency with the USD (until you trade or use it).

Now, when you know when you have to report cryptocurrency gains/losses, it’s time to count how much you need to pay.

Tax calculation

To calculate taxes, American cryptocurrency holders should determine the fair market worth of the traded cryptocurrency at the time of the purchase, basing on the published exchange rates and including the value of appreciation and depreciation.

Firstly, you need to determine the cost basis.

Cost basis is the original value of an asset for tax purposes, usually the purchase price (source: Investopedia.com).

When talking about cryptocurrency, the cost basis consists of the purchase price and all other costs related to purchasing the cryptocurrency. Such costs may include transaction fees and commission that you pay to your broker.

Formula:

(Purchase Price of Cryptocurrency + Other Fees) / Quantity of Holding = Cost Basis

Let’s assume you invested $500 in Ether, so you would buy 3.89 Ether. Imagine you had to pay a fee of 1% to an exchange. Your cost basis is:

($500 + 1%*500)/3.89 = $129.82 per Ether

Secondly, you need to deduct the cost basis from fair market value (sale price). Counting it, you will define your capital gain/loss.

Fair market value or sale price is the price at what cryptocurrency holder sells the asset.

Formula:

Fair Market Value – Cost Basis = Capital Gain/Loss

Let’s imagine you decided to sell one Ether after the price reached $250 per unit. It’s a taxable issue as you traded crypto to fiat currency.

250 (fair market value) – 129.82 (cost basis) = $120.18

Your capital gain equals to $120.18. 

$120.18 is the sum you need to pay taxes for.

Long-term vs short-term taxes

Taxes are also classified by a period of holding.

– If the cryptocurrency is sold within 1 year after purchase, the owner will pay a short-term capital gains tax.

– If the cryptocurrency is sold after 1 year, the owner will pay a long-term capital gains tax. The percentage (0%, 15% or 20%) depends on taxable income and filing status.

US taxation is one of the most complicated. That’s why American traders prefer using special apps that ease their lives counting gains and losses, creating records. Useful sources will be listed later.

We have figured out how to count gains. But what if you survived losses? Will you need to pay taxes?

What If You Survived Losses

There is a tax reduction strategy that may help to reduce your taxes at the year-end. The idea of the strategy is to sell a capital asset at a loss to offset taxes on both gains and income. A great feature of cryptocurrency losses is that capital losses offset other types of capital gains. 

Simply saying, if you bought Bitcoin for $2,000 and the price of Bitcoin fell to $1,300, you survived a $700 loss. At the same time, you gained $5,000 trading stocks. You can use a $700 loss to offset $5,000 gain. In the end, you will pay a tax for $4,300.

Remember about $3,000

You should take into consideration a $3,000 figure. If your net capital loss is less or equal to $3,000, the entire capital loss can be used to offset other types of income.

However, if the loss is bigger than $3,000, the amount above $3,000 will be carried forward to the next tax year.  

Wash sale rules

Imagine you bought a cryptocurrency and survived losses. However, you still want to hold this cryptocurrency. All you need to do is to buy another cryptocurrency with that you already have. The loss you survived will be reported in the paper. After that, you will be able to buy your cryptocurrency back. At the same time, you will use this reported loss to offset other gains. 

Now you may think: what if I avoid reporting? It may be a bad decision. The IRS will consider that as a tax fraud that may be followed by criminal prosecution and a penalty of up to $250,000.

Bitcoin Tax Worldwide

America is not only a country that requires tax reports. There are other ones you should know about to not get into trouble.

Switzerland

 · If you trade a cryptocurrency from your personal account, your gains/losses are tax-exempt

· If you receive income by mining cryptocurrency, the income will be a subject of a self-employment tax

· If you earn a cryptocurrency trading professionally, you will pay a business tax

· If your wage is paid in a cryptocurrency, you will report it on your income taxes

Canada

 · If you are a day trader with high transaction volumes, you will pay taxes

Australia

 · Capital gains tax applies

Germany

 · No capital gains tax

· Crypto businesses pay taxes on gains (including corporate income taxes)

· Trading tokens is tax-except (in case capital gains don’t exceed 600 euros annually)

Tax Haven Bitcoin Countries

Malaysia

 · No capital gains tax

Slovenia

 · If your income is in cryptocurrency or you have a cryptocurrency business, you will pay a tax

Singapore

 · If you gain profit via trading from your crypto holdings, you need to pay a tax

· If you hold a crypto asset for a long period (considered as a long-term investment), you don’t pay taxes

Portugal

 · Cryptocurrencies are not under

personal income or VAT taxes

· Businesses pay taxes on the profits they make due to crypto gains 

 If you haven’t found your country in the list, it’s worth checking the state legislation.

Bitcoin Tax Calculators

It’s time to consider the way you can report your capital gains/losses.

If we talk about the American tax system, to report, you will need to fill in the Schedule D form. This form is used to list your capital gains/losses from all personal property such as cars, stocks, bonds, and cryptocurrencies. Before filling in the Schedule D form, you will need to detail all of your trades in the 8949 form. As for other countries and legislations, you will need to check the websites of the authorities controlling the cryptocurrency tax law.

Now you may think that cryptocurrency trading became more complicated. But don’t give up. Technical innovations are here to help you. There is tax software that will help you to stay on the right side of the law. It analyzes trades and generates real-time reports, provides the value of coins, and sets reports for taxes.

There are many apps. However, it’s highly important to choose the best for you. Here is the list you can pick from. All of them offer an analysis of trades and reports for taxes.

  1. Cryptotrader.tax Easy and reliable way to prepare your cryptocurrency taxes.
  2. CoinTracking. The website provides information about taxation in different countries.
  3. TokenTax. The source supports different exchanges for tracking trades and calculating taxes.
  4. CoinTracker. The full support is provided in the US, UK, Canada, Australia, and partial in every other country.
  5. BearTax. The website covers many exchanges. Pick yours.

Bitcoin Tax Tips

  1. Record-keeping is the key. It’s highly important to record each of your gain/loss no matter what period they relate to. Mistakes in records may cause penalties.
  2. Use the app. It may be complicated to fill in a report of capital gains. Apps will make your life easier.
  3. Use the advice of professionals. If you have difficulties reporting, ask a professional to help you.
  4. Don’t avoid paying taxes. If you think you could avoid paying, it’s a wrong idea. Penalties may cost more. 

To conclude, we can say that to avoid troubles, it’s highly important to know whether your crypto activity is a subject of taxation or not. Although it may seem difficult to count the amount you need to report, there are many apps that are ready to solve your issues. The crypto tax legislation differs from country to country. To not get into trouble, it’s worth checking the state laws. 

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