Wednesday, August 10, 2022

How To Do Crypto Taxes

When Do You Need To Report Your Crypto Taxes To The Cra

How to Do Your Crypto Taxes in 10 minutes – CryptoTrader.Tax Demo

The Canadian financial year is the same as the calendar year so it runs from the 1st of January to the 31st of December every year. This means the current financial year is 1st of January 2021 until the 31st of December 2021. You need to report your crypto income, capital gains and losses to the CRA by the 30th of April 2022. If you’re self-employed you have until the 15th of June 2022. You’ll report all your crypto taxes in your annual Income Tax Return.

Claim Expenses For Mining

While it might seem like a low-cost activity in theory, mining crypto comes with considerable expenses, including computers, servers, electricity and internet service provider charges. If you are a crypto miner, you can deduct these costs against your mining income, though the amount youll be able to deduct will depend on whether you categorize your operation as a business or as a hobby.

Understanding Tax Calculation Accounting Methods: Fifo Lifo Hifo

When you sell your crypto, you have to pay taxes which can be calculated using the formula:

Value at the time of selling – Cost Basis = Capital Gain

However, if the value at the time of selling is higher than the value at the time of purchase , youâll incur a capital loss. This loss can be used to offset your capital gains in a particular year with a method known as tax-loss harvesting.

Now, the accounting method you choose to calculate your taxes decides how much tax you have to pay and can also significantly reduces your taxes. The most popular tax calculation accounting methods are:

  • FIFO
  • LIFO
  • HIFO
  • In order to understand each of these accounting methods, letâs look at a simple example. Suppose, on April 1st, Jake purchased $3000 of ETH. In May, he purchased another $3500 of ETH, and on July 1st he sold ETH for $4000.

    Now, what will be the capital tax that he pays on his gains? Letâs explore method by method.

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    How To Report Cryptocurrency On Taxes: Foreign Crypto Exchange Tax Reporting

    Do you own $10k worth of cryptocurrency in one of the most popular foreign exchanges? Binance , Kucoin , Bitfinex , Jaxx , and Huobi are widely used crypto investors in the US and abroad. If you do have $10,000 USD or more, you need to report that to the US Government.

    According to the so-called âThe Paul Manifort Rule,â holding over $10,000 USD in a foreign account or accounts at any point during the taxable year triggers a requirement to file Form 114 â Report of Foreign Bank and Financial Accounts with the Financial Crimes Enforcement Network . Note that although the filing deadline is the same as the tax return, the FBAR filing is not part of the tax return and is filed separately/directly with FinCEN.

    For crypto traders, this means that if your holdings at a non-US-based exchange exceeded $10,000 at any given point of the year, you will need to file Form 114 with FinCEN. Further, if you have two foreign exchange accounts that each had a maximum of $5,001, then you still need to file an FBAR, since the aggregate is over $10,000.

    The Basics Of Crypto Taxes

    The Ultimate Crypto Tax Guide (2021)

    In the U.S., cryptocurrencies like Bitcoin are treated as property for tax purposes.

    Just like other forms of property like stocks, bonds, and real-estate, you incur capital gains and capital losses on your cryptocurrency investments when you sell, trade, or otherwise dispose of your crypto.

    Depending on what tax bracket you fall under, you will pay a certain percentage of tax on this capital gain. Tax rates fluctuate based on your personal tax bracket and whether the gain was short term or long term .

    Outside of buying, selling, and trading, if you earn cryptocurrenciesâwhether through a job, mining, staking, airdrop, or interest from lending activitiesâyou are liable for income taxes on the US Dollar value of your crypto earnings.

    We will walk through examples for all of these scenarios in more detail below.

    Also Check: Should We Invest In Cryptocurrency

    Possible Changes From The Irs

    Recently, four US congressmen sent a letter to the IRS saying that they want the IRS to tax staking rewards at the time you sell the cryptocurrency received from staking instead of the time you receive them. In this letter, the congressmen argue that the tax guidance for cryptocurrency mining is not directly applicable for staking rewards because of the way new coins are received by the person.

    There has not yet been any official response from the IRS regarding this, but we can assume that the agency is aware of the concerns expressed and that they might come out with a new policy in the not so distant future. Its important to understand that this would not change the taxable income amount for staking rewards, but simply delay the entire taxation in to the future when the coins are actually sold instead of when they are received.

    Coinpanda follows any updates or statements from the IRS closely, and we will update this article whenever there are any news or changes related to the taxation of staking.

    Youll Be Asked Whether You Owned Or Used Cryptocurrency

    Your 2021 tax return requires you to state whether youve transacted in cryptocurrency. In a clear place near the top, Form 1040 asks, At any time during 2021, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?

    So youre on the hook to answer definitively whether youve transacted in cryptocurrency, putting you in a position to potentially lie to the IRS. If you dont answer honestly, you could be in further legal jeopardy, and the IRS does not look kindly on liars and tax cheats.

    However, there is a footnote. In a recent clarification, the IRS said that taxpayers who only purchased virtual currency with real currency were not obligated to answer yes to the question.

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    Crypto Taxes When You Mine Crypto

    If you earn cryptocurrency by mining it, or receive it as a promotion or as payment for goods or services, it counts as part of your regular taxable income. You owe tax on the entire fair market value of the crypto on the day you received it, at your regular income tax rate.

    And if you hold the same cryptocurrency you mined or earned from these activities, its value increases, and you either spend it or sell later at a profit, you would also owe capital gains taxes on the profits, based on how long youve held it.

    What If You Forgot To Report Your Crypto Taxes

    How to File your Crypto Taxes Using & CoinTracker

    If youâre like many other crypto investors, thereâs a strong chance that you werenât always aware of the fact that your crypto-related income needed to be reported on your taxes.

    If you are in this situation, donât stress out. You can amend a prior year’s tax return to include your crypto-related income with IRS Form 1040X.

    Many cryptocurrency investors go through this process without issue, and itâs always better to amend your return in good faith rather than waiting for the IRS to find you.

    For a detailed guide, check out our blog post on how to amend your tax return to include your crypto.

    Recommended Reading: Where Can I Use My Bitcoin

    Do I Need To Report My Capital Losses

    Remember, itâs important to include any cryptocurrency capital losses that youâve incurred during the tax year in this section. After all, every taxable event must be reported to the IRS.

    Thereâs also a tax benefit to reporting capital losses. Capital losses can offset your capital gains and up to $3000 of personal income.

    For more on this subject, check out our complete guide to tax-loss harvesting.

    How To Avoid Tax On Cryptocurrency Canada

    Want to know how to avoid tax on cryptocurrency in Canada? You can’t outright avoid all your taxes – but there are a few ways to reduce your tax bill down by a sizeable amount! You can see our complete guide to avoiding crypto tax, but in short:

    Invest in an RSP

    Investing in a Retirement Savings Plan can help you prepare for the future an reduce your tax bill. You can deduct contributions to RSAs from your tax bill. You can also contribute to a spousal RRSP and deduct this too!

    Offset your losses

    You can offset half your capital losses against your capital gains in Canada. If you still have losses left over, you can carry them forward to future tax years and even apply them retrospectively to previous tax years to get a tax refund.

    Track and harvest your unrealised losses

    Your losses are only realised once you dispose of your asset by selling it, swapping it, spending it or gifting it. But you’ll have an unrealised loss when the price of your asset has depreciated since you bought it. If you’re facing a large tax bill, you can sell these assets at a loss to reduce your tax bill. You can even buy them back later – but make sure to leave this more than 30 days to avoid the superficial loss clause.

    Donate crypto

    Donations help you earn Provincial and Federal Tax Credit that you can use to offset your tax bill. So find a worthy cause and give generously!

    Remember, you’ll need to make any moves to optimize your tax position within the financial year

    Read Also: Where To Buy Apollo Cryptocurrency

    Trading Cryptocurrency In Your Tfsa And Rrsp

    With any potential capital gain, investors will always try to shelter themselves from taxes. The next logical question people ask is can I trade cryptocurrency in my TFSA and RRSP?

    No, you cant. Nor can you transfer any Bitcoins you currently have into your TFSA or RRSP. Cryptocurrencies operate on their own exchange which does not tie any accounts which are tax friendly. That said, there are now cryptocurrency ETFs that can be purchased within your TFSA or RRSP.

    How Do Nft Taxes Work

    What Are Crypto Taxes?

    Non-fungible tokens, or NFTs, have exploded in popularity amongst crypto native audiences and beyond.

    From a tax perspective, NFTs are treated as property, similar to other cryptocurrencies. When you buy an NFT and later sell it, you incur a capital gain or loss that gets reported on IRS Form 8949.

    For more information, check out our Complete NFT Tax Guide.

    Read Also: What Is Bitcoin Worth Now

    How Do Defi Taxes Work

    Recently, cryptocurrency lending platforms and other DeFi services like Uniswap, Maker, and Compound have exploded in popularity.

    Receiving interest income from crypto lending activities or liquidity pools is considered a form of taxable income and must be reported on your taxesâsimilar to mining and staking rewards.

    The full tax implications associated with transactions common to the DeFi landscape are outside of the scope of this piece however, we discuss them thoroughly in our Defi Crypto Tax Guide.

    What Are Crypto Taxes

    Cryptocurrency is considered property for federal income tax purposes. And, for the typical investor, the IRS treats it as a capital asset. As a result, crypto taxes are no different than the taxes you pay on any other gain realized on the sale or exchange of a capital asset.

    When you purchase a capital asset be it a stock, bond, house, widget, Dogecoin, Bitcoin, or other investment you establish a basis equal to your cost to acquire it. When you sell, you compare your sales proceeds to the basis to determine whether you have a capital loss or a capital gain. If your proceeds exceed your basis, you have a capital gain. If reversed, you have a capital loss.

    You’ll also need to consider the time period for which you held the asset. Depending on how long you hold your cryptocurrency, your gains or losses will be considered short-term or long-term. That distinction will also play a big role in how much you have to pay in crypto taxes.

  • Short-Term Capital Gains and Losses. When you buy and sell an asset within a 365 day period, you recognize a short-term capital gain or loss. Short-term gains are subject to the same tax rates you pay on ordinary income, such as wages, salaries, commissions and other earned income. The IRS has seven tax brackets for ordinary income ranging from 10% to 37% in 2021.
  • Read Also: How Do You Receive Money From Bitcoin

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    Example : Business Income Or Loss

    How To Do Your Revolut Crypto Taxes [With Koinly]

    Alice regularly buys and sells various types of cryptocurrencies. She pays close attention to the fluctuations in the value of cryptocurrencies and intends to profit from the fluctuations. Her activities are consistent with someone who is engaged in the business of day trading. In 2017, Alice sold $240,000 worth of various cryptocurrencies, which she originally purchased for $200,000. Her net profit is $40,000. Since Alice is actively trading in cryptocurrency, which is a commercial activity, she has to report business income of $40,000 on her 2017 income tax return.

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    How To Do Crypto Taxes

      Wondering how on earth to work out your crypto taxes? Or how to file your crypto tax at tax time? Koinly explains it all in this quick guide on how to file your crypto tax.

      Worried about how to report your cryptocurrency taxes? The good news is, filing your crypto taxes is probably a lot easier than you think. That’s because crypto tax calculators like Koinly do all the tricky calculations for you – leaving you with only one job. That is, to share your crypto tax report with your accountant, or file via a tax app like TurboTax, TaxAct or H& R Block, or online using your governments tax portals. Let’s look at how to file your crypto taxes in 5 easy steps:

      I Earned A Profit From Bitcoin In Previous Years Can I Retrospectively Declare This Income To The Irs

      2019 was the first year that the IRS included a reference to cryptocurrency on their tax documents.

      Citizens and resident aliens were asked on Form Schedule 1 At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?

      Schedule 1 is used to report income that is otherwise not listed on Form 1040. This typically includes capital gains, alimony, or gambling winnings.

      However, Schedule 1 which nonresidents received did not reference cryptocurrency. Instead, nonresidents were expected to report their gains on Schedule NEC along with their Form 1040NR.

      In 2020, the IRS recognized that the process needed to be simplified as millions of dollars of cryptocurrency slipped through the net.

      With this in mind, the IRS moved the virtual currency question to the main 1040 tax return form.

      If you have earned income from cryptocurrency which has not previously been reported, it is advisable to declare this income to the IRS.

      Despite the IRS only beginning to update their tax documents in 2019 in relation to cryptocurrency, the US tax authority had issued notices as far back as 2014 and many of the rules outlined at that time are still in force today.

      In summary, if you were paid for personal services with cryptocurrency such as Bitcoin, its advisable to report it on your tax return, the same as ordinary income.

      Recommended Reading: Where Can I Buy Dogecoin Cryptocurrency

      Capital Gain & Loss On Crypto

      A capital gain or loss is incurred on trading or selling cryptocurrency. Just like traditional assets, capital gains will be incurred when the price of selling is greater than the price it has been acquired for . On the other hand, a capital loss is incurred when the price of selling is lesser than the price it was acquired for.

      Before selling a capital asset, you must figure out if the investment was short-term or long-term. Long-term gains and losses are incurred when the assets were held for more than a year, whereas short-term capital gains and losses are incurred when the assets have been held for less than one year.

      Calculating Taxes When You Buy And Sell Cryptocurrency

      How to do your crypto taxes

      When you buy and sell cryptocurrency, comparing your net proceeds to your cost basis isn’t the only step in figuring how much you owe in crypto taxes. You also need to consider the length of time you held the asset, as this determines the type of capital gain or loss you recognize. Depending on how long you hold your cryptocurrency, your gains or losses will be considered “short-term” or “long-term.” That distinction will play a big role in how much you have to pay in crypto taxes.

    • Short-Term Capital Gains and Losses. When you buy and sell an asset within a 365-day period, you recognize either a short-term capital gain if it sold for more than what you paid for it or a short-term capital loss if it sold for less than what you paid for it. Short-term gains and losses are subject to the same tax rates you pay on ordinary income, such as wages, salaries, commissions, and other earned income. The IRS has seven tax brackets for ordinary income ranging from 10% to 37% in 2021.
    • Long-Term Capital Gains and Losses. If you buy an asset and sell it after one year, the resulting difference between your net sales proceeds and your cost basis is a long-term capital gain or loss. Typically, you’ll pay less tax on a long-term gain than on a short-term gain because the rates are generally lower. Currently, there are three tax rates for long-term capital gains 0%, 15%, and 20%. The rate you pay depends on your income.
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