How Does Margin Trading Work
With margin trading, an investor is borrowing money, often from an exchange or Decentralized Finance platform. To get started, an investor makes an initial deposit into the margin account . Unlike regular trading, the margin account allows the investor to trade with leverage.
For example, lets take a look at George. He has one bitcoin and wants to buy ether . Without margin, George could deposit his 1 BTC on an exchange and buy only 1 BTC worth of ETH. With a margin account however, George can deposit 1 BTC and select a level of leverage, say 5X. The 1 BTC would be held by the exchange as collateral, and the exchange would give George 5 BTC worth of nominal money to trade with on the exchange. The nominal money can only be used to trade on the exchange within the margin account but not withdrawn from the exchange. Now Georges buying power is 5X what it was without margin.
If George goes all in on ETH and the price of ETH increases by 10%, George makes 0.5 BTC profit instead of what he would have made without margin . This however cuts both ways if the price of ETH drops 10%, George loses 0.5 BTC instead of 0.1 BTC.
In the crypto world, the amount of leverage on a margin account can vary from small amounts to huge amounts . For the skilled trader, leveraged derivatives allow for significant amplification of profits in a short period of time however these financial contracts can also lead to hasty financial ruin.
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How Are Airdrops Taxed
Cryptocurrency received from an airdrop is taxed as income. This means that you are liable for income taxes on the USD value of the claimed airdrop. If you sell, trade, or otherwise dispose of your airdropped tokens in the future, you will incur capital gains or losses depending on how the price of your tokens has fluctuated.
The IRS is clear in its guidance regarding the income treatment of airdrops.
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Inherited Cryptocurrency Is Treated Like Other Inherited Assets
Inherited cryptocurrency is treated like other capital assets that are passed from one generation to another. They may be subject to estate taxes if the estate exceeds certain thresholds .
Like stock, cryptocurrency enjoys a stepped-up cost basis to the fair value on the day of death. So generally, cryptocurrency is treated for most people like a typical capital asset, says Harris.
How Are Crypto Gifts Taxed
If you are feeling generous, you can send a cryptocurrency gift to a friend or family member. Generally, cryptocurrency gifts are tax-free.
If you send a gift with a fair market value above $15,000, you will need to file a gift tax return. Remember, this form is for informational purposes and does not mean you will be required to pay taxes on your gift.
For more information, check out our guide to crypto gift taxes.
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Adding And Removing Liquidity
If you’re investing in DeFi protocols – the vast majority of these protocols use liquidity pools. On the surface, we can liken this to transferring your asset to another wallet or exchange. You’re not disposing of the asset and you can take the original asset back at any point.
In some instances, this will be true. But many DeFi protocols now give investors a token that represents their share in the liquidity pool – so you’re swapping your crypto for another asset. Crypto-to-crypto swaps are a taxable event as you’re disposing of one asset for another – even if you then get that asset back later, you’re still swapping a token for it. This could be subject to Capital Gains Tax.
It’s important to note the CRA hasn’t given any guidance on this yet – so you should speak to an experienced crypto accountant who can advise you on these transactions.
Get Started With Cryptocurrency Tax Software
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Disclaimer – This post is for informational 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 the taxation of digital currencies.
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What Crypto Records Will The Cra Want
The CRA is fairly clear on the fact that you have to keep extensive records of your crypto transactions.
The problem with exchanges is that there is no standard for the records they keep and how long they keep them. This means that the onus is on the taxpayer to periodically export information from these exchanges to make sure they are maintaining meticulous records. You need to keep all the required records along with supporting documents for at least six years from the end of the last tax year that the records relate to.
Here are the different kinds of records you are expected to maintain:
- Transaction date
- Receipts of purchase and transfer of crypto
- The fair market value of the cryptocurrency in CAD at the time of the transaction
- A description of the transaction and the cryptocurrency address of the other party
- The accounting and legal costs
- The exchange records
- Digital wallet records and cryptocurrency addresses
- Software costs related to managing your taxes
You can use Koinly for your record keeping without paying anything! Just sync your exchange accounts via read-only API keys and your blockchain wallets using your public keys or addresses. Koinly will then sync your transaction history automatically from time to time – so you’ll always have great records of your crypto transactions.
Keeping Good Records Of Your Trading History
Trading on cryptocurrency exchanges is done against various pairs, unlike capital markets where it is done against national currency .
Example: In NYSE, TSLA trades for USD
However, a cryptocurrency like Ethereum is traded on Binance with multiple pairs like BNB, BTC, XRP, USDC, USDT, USDC, PAX.
It is really important for you to keep track of these trades as every trade generates a taxable event. Even when you are trading one cryptocurrency into another cryptocurrency is a taxable event.
Choose exchanges that provide transaction history, so that it makes your life easy when it comes to taxes. You should be able to export to CSV or fetch your trades via API. This will ensure you know what you are playing with and how much is the price paid along with fees paid.
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Track Addresses For Token Sales & Mining Transactions
If you are into mining or working as an affiliate for a specific cryptocurrency project or working as a community manager for an ICO, there is a good chance that you fall into the category of earning cryptocurrency as an income.
This is taxed differently compared to trading. Here, you get the cryptocurrency as a deposit to your registered wallet regularly or one time. You need to keep track of these addresses . Yeah, that sounds crazy, but its early days and we need to live with it.
Since the cryptocurrency earned through mining or salary is taxed as income, you need to have addresses and records of it to claim it as income and taxed in a separate lower rate, unlike short term capital gains.
Just Using Crypto Exposes You To Potential Tax Liability
You might think that if you only use but not trade cryptocurrency youre not liable for taxes.
Any time you exchange virtual currency for real currency, goods or services, you may create a tax liability. Youll create a liability if the price you realize for your cryptocurrency the value of the good or real currency you receive is greater than your cost basis in the cryptocurrency. So if you get more value than you put into the cryptocurrency, youve got yourself a tax liability.
Of course, you could just as well have a tax loss, if the value of goods, services or real currency is below your cost basis in the cryptocurrency.
In either case, youll have to know your cost basis to make the calculation.
Its important to note that this is not a transaction tax. Its a capital gains tax a tax on the realized change in value of the cryptocurrency. And like stock that you buy and hold, if you dont exchange the cryptocurrency for something else, you havent realized a gain or loss.
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Alternatives To Crypto Tax Software
If youre not confident with crypto tax software tools, alternatives exist, such as:
- Crypto CPAs or attorneys: these are tax professionals that specialize in the complex world of digital taxation and crypto regulations. They can take your data and reconcile your records.
- Do it yourself: we know that taxes are complicated, but it is possible for you to do the calculations yourself if you have the background or if your situation is quite straightforward.
How Is Crypto Interest Taxed
Currently, platforms like Gemini and BlockFi offer users interest rewards for holding select cryptocurrencies. Meanwhile, DeFi protocols like Compound offer users rewards for staking crypto.
Cryptocurrency interest and crypto staking rewards are both considered personal income and are taxed accordingly.
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Crypto Margin Trading Derivatives And Other Cfds
The tax treatment of crypto margin trading, derivatives products like Bitcoin futures and other CFDs all depends on whether you’re seen to be acting as a day trader or an individual investor. So it will all depend on the scale at which you’re trading – but let’s look at both scenarios and the taxation.
How Are Airdrops And Forks Taxed In Canada
The CRA has no specific guidance on how airdrops and forks are taxed in Canada – but we can infer their tax treatment from their guidance on what is considered business income. Forks and airdrops are unlikely to be taxed as income on receipt, but you will pay Capital Gains Tax when you later sell coins or tokens you received from an airdrop or hard fork.
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Know Your Crypto Tax Rules
Keepthis guide in mind when filing your taxes this year. If you sold, traded, paidwith, or get paid in cryptocurrency, you completed taxable events. Include thisinformation in your tax return.
Daytrading crypto is great. Just make sure youre prepared for the tax you willowe.
Formore information about cryptocurrency, keep an eye on our website. Weve gotarticles to help you understand every aspect of this fascinating currency.
Reporting Crypto Ordinary Income
Unfortunately, ordinary income doesnât fall nicely onto one tax form like we saw with capital gains and Form 8949.
The ordinary income you receive from mining, staking, interest accounts, or perhaps crypto you received as payment from a job get reported on different tax forms, depending on the specific situation.
Schedule C – If you earned crypto as a business entity, like receiving payments for a job or running a cryptocurrency mining operation, this is often treated as self-employment income and is reported on Schedule C.
Schedule B – If you earned staking income or interest rewards from lending out your crypto, this income is generally reported on Schedule B.
Schedule 1 – If you earned crypto from airdrops, forks, or other crypto wages and hobby income, this is generally reported on Schedule 1 as other income.
To make things easier for investors, CryptoTrader.Tax generates a complete income report that is included with your completed crypto tax reports. This report details the US Dollar value of all of your cryptocurrency income events that you received throughout the year: mining, staking, airdrops, and more. This income report can be used to complete your relevant ordinary income tax forms like Schedule 1, Schedule B, and Schedule C.
If you have any questions about how your crypto-related income needs to be reported, feel free to reach our live-chat customer support team via the chat widget on our homepage. We’re happy to answer any of your questions!
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Tax Reporting For Automated Traders
In the simple example above, its easy to calculate the $300 capital gain that would be associated with Craigs trade however, for traders using automated strategies or trading across multiple exchanges, these calculations can become much more difficult.
Each crypto-to-crypto trade triggers a taxable event , meaning you realize either a gain or loss in the cryptocurrency you are disposing of . As you might expect, tracking the US dollar value of your gain and loss across all of your crypto-crypto trades is difficult. Thus, proper record keeping is important for algo traders who want to simplify their tax reporting at the end of the year.
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Claiming A Capital Loss On Cryptocurrency
Capital losses can offset capital gains within the current or future financial years. It is important to note that capital losses can not be used to offset capital gains from previous tax years. But if you make a capital loss in cryptocurrency and a capital gain in the stock market in the same financial year, you can use the crypto capital loss to offset your stock gains.
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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If You Receive Cryptocurrency As Payment For Goods Or Services
Many businesses now accept Bitcoin and other cryptocurrency payments. If someone pays you cryptocurrency in exchange for goods or services, the payment counts as taxable income, just as if they’d paid you via cash or check. You owe taxes on the fair market value of the cryptocurrency on the day you received it.
Record Keeping For Cryptocurrency
Irrespective of whether you are a business, investor or personal user of cryptocurrency, it is important that you maintain records of all your cryptocurrency exchanges. Records may be requested at the discretion of the ATO and generally need to be held for a period of 5 years after the cryptocurrency exchange.
The records you maintain must include the following:
- the date of the transactions
- the value of the cryptocurrency in Australian dollars at the time of the transaction
- what the transaction was for and who the other party was .
In addition to the above requirements, your records should contain:
- receipts of purchase or transfer of cryptocurrency
- exchange records
- records of agent, accountant and legal costs
- digital wallet records and keys
- software costs related to managing your tax affairs
As stated on the ATO website as of 12 July 2020.
This is generally a tedious process and one in which our software can streamline for you.
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Taxation For Miners And Independents
The activity of mining cryptocurrency is considered a special case where a self-employed individual receives cryptocoins for their mining work. They are expected to report the fair market value in U.S. dollars of the coins as on the receipt day and it will be treated as gross income. If the mining constitutes a trade or business, the miner may be subject to pay self-employment tax.
Other independent workers or contractors who receive bitcoins for their work should treat it as a gross income, and pay self-employment taxes on the same.