Guide For Cryptocurrency Users And Tax Professionals
Cryptocurrency is a relatively new innovation that requires guidelines on taxation so that Canadians are aware of how to meet their tax obligations. The Senate reviewed the issue of taxation on cryptocurrency in 2014 and recommended action to help Canadians understand how to comply with their taxes, which the Canada Revenue Agency is doing by presenting this guide.
How Does Cryptocurrency Affect My Credit Score
Your decision to invest in cryptocurrency has no effect on your credit score whatsoever. Your only gets affect when a lender needs to look at your credit history or if you currently have a contract in place where you need to make regular payments. For example, applying for a new credit card, or your payment history with your wireless provider would affect your credit score.
Even though cryptocurrency doesnt affect your credit score directly, that doesnt mean you shouldnt know where you stand. Your credit score is a number between 300-900. The higher the number, the more creditworthy you are. This is essential if you ever need a loan in the future as lenders want to know that they can trust you to repay the loan. If you want to know what your credit score is, you can;check it for free with Borrowell.
Include Totals From 8949 On Schedule D
Once your 8949 is filled out, take your total net gain or net loss and include it on Schedule D.
Schedule D allows you to report your overall capital gains and losses from all sources. In addition to your short-term and long-term gains that come from 8949 and your crypto activity, other line items reported on Schedule D include Schedule K-1s via businesses, estates, and trusts.
Read Also: Where Can I Buy Dash Cryptocurrency
Taxation Under The Central Goods And Services Tax Act
Any business activity pertaining to cryptocurrencies or crypto assets, unless specifically exempted, is taxable under the CGST Act.
Indian crypto exchanges already charge GST from their users. This indirect tax is included in the trading fee that exchanges add to the buying price of Bitcoin, Ethereum, Tether, etc. Furthermore, the exchanges pay GST to the government as part of their general tax payments.
Recently, the Central Economic Intelligence Bureau has raised a proposal to the Central Board for Indirect Taxes and Customs to bring cryptocurrency exchanges and platforms under the GST purview. It has suggested that cryptocurrency mining be treated as a supply of service as it generates cryptocurrency and charges transaction fees, and as such, should classify as an intangible asset and attract a GST of 18 percent. The CEIB has also proposed that the taxpayers operating as cryptocurrency miners will be required to register under GST if their annual revenue exceeds INR 2 million. GST will be liable on the transaction fee and/or the reward, which is the currency mined.
This article was originally published on July 6, 2021. It was last updated July 20, 2021.
What If I Run A Cryptocurrency Business
If you hold cryptocurrency for sale or exchange in the ordinary course of your business, the trading stock rules apply. This means that the proceeds from the sale of cryptocurrency held as trading stock in a business are classed as ordinary income, and the cost of acquiring cryptocurrency held as trading stock can be claimed as a deduction.
However, in order for the above rules to apply, youll need to satisfy the ATOs requirements for running a business. These are outlined in the ATO guidelines to how cryptocurrency is taxed and include:
- Operating for commercial reasons and in a commercially viable way
- Acting in a business-like manner, for example preparing a business plan and acquiring capital assets or inventory in line with the business plan
- Preparing accounting records
- Intending to make a profit
- Being able to demonstrate repetition and regularity in your business activities
This is once again a complex area so youll need to seek out expert advice from a cryptocurrency tax professional.
Tax Treatment Of Cryptocurrency Trading
Despite what the term suggests, cryptocurrency is not recognized by Canadian law as âcurrency.â Instead, the Canadian Revenue Agency treats Bitcoin and other crypto assets as a commodity equivalent to investment property such as a stock ownership for tax purposes. Any gains or loses arising from an individualâs cryptocurrency portfolio are thus taxed in the same manner as any other commodity investment in Canada. Depending on your circumstances, the income you get from disposing of cryptocurrency may be considered business income or a capital gain and must be reported as either property income or business capital.
Countries With 0% Tax On Bitcoin/cryptos: Tax Free Life
Lets talk about Bitcoin/crypto taxation today.
I have seen many millennials;anxiously talking about tax-free crypto countries and taxation laws of their countries. These millennials, just like you and me, are also Bitcoin/crypto investors and HODLers.
In my opinion, Bitcoin/cryptos should not be taxed because we already buy cryptos with our hard-earned money which is already taxed in our respective countries. So I think after the original Capital Gains Tax, there should be no taxation, otherwise, it will be like taxing the same money twice.
But hey, thats just my opinion
Encouraged by this discussion, today I am doing this post to talk a little about;tax-free crypto countries.
Tax-free crypto countries!?!?
The first obvious question that might come to mind is:
- Are there any countries in the world;where Bitcoin/other cryptos are not taxed?
And the answer to this is YES! There are!
But some countries are really confused on whether to consider Bitcoin/cryptos as a commodity, currency, or an asset.
So until that confusion gets resolved, Im going to talk about some tax haven countries for Bitcoin/cryptos that can benefit you.
Note: There are all sorts of Bitcoin taxes in different countries , etc.) But in this article, we will talk only about;CGT because thats the only one that matters to end users or investors like us.
Recommended Reading: What Blockchain Company To Invest In
If You Are A Crypto Accepting Merchant
If you either accept cryptocurrency for goods or services or pay for goods and services using cryptocurrency it is your responsibility to ensure that you are being compliant with the applicable tax regulations. As such, any taxpayer who engages in these activities should establish a system for recording transactions including calculations of fair market value within their books to mitigate against any errors.
The CRA recommends that anyone who acquires or disposes of cryptocurrency, should maintain the following records on such transactions:
- the date of the transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party
- the exchange records
- accounting and legal costs
- the software costs related to managing your tax affairs
Reporting Crypto Capital Gains And Losses
Your capital gains and losses from your crypto trades get reported onIRS Form 8949.
Form 8949 is the tax form that is used to report the sales and disposals of capital assets, including cryptocurrency. Other capital assets include things like stocks and bonds.
To fill out Form 8949, list all of your cryptocurrency trades, sells, and disposals onto Form 8949 along with the date you acquired the crypto, the date sold or traded, your proceeds , your cost basis, and your gain or loss for the trade.
Once you have each trade listed, total them up and fill in your net capital gain or loss for the year at the bottom.
For a detailed walkthrough of filling out Form 8949, checkout this blog post: How To Report Cryptocurrency to the IRS with Form 8949.
Recommended Reading: How To Avoid Paying Taxes On Crypto
Getting Help From A Tax Expert
Not only is cryptocurrency taxation complicated and confusing, its also in its early stages and is still evolving. While some people will have the knowledge to accurately report their crypto transactions themselves, many others particularly those who have made substantial capital gains will be better off getting help from an accountant or registered tax agent.
Cryptocate can help you meet your EOFY cryptocurrency reporting requirements.
- Get a competitive quote for any investor type.
- Receive personalised service and support from a team of professionals.
- Take the stress out of EOFY cryptocurrency reporting.
However, before choosing an agent or accountant, make sure they have specialist knowledge regarding cryptocurrencies and tax. As this is such a new area of taxation, some professionals may not have the necessary knowledge to provide accurate advice.
One final word of warning: theres still much we dont know for certain about how the ATO will treat cryptocurrency. There are still plenty of kinks to be ironed out, so getting advice from an accountant or registered tax agent is the best way to make sure you dont end up with a big headache come tax time.
Do You Pay Taxes For Holding Cryptocurrency
If you simply buy bitcoin or another cryptocurrency and hold it in a wallet, you do not have any sort of tax reporting requirement as you havenât realized a gain or loss on your investment yet.
Once you sell, trade, or trigger a taxable event by disposing of the coin, this is when you realize a capital gain or loss.
Also Check: How To Calculate Market Cap Crypto
What Taxes Are Applicable For Short Term Trades
If frequently traded with an intent to benefit from the quick move-in prices, i.e., benefit from the volatility, it cannot be considered for investment purposes and is construed as trading. The gains from trading are liable to taxes as business income and not capital gains. Moreover, tax is also applicable to the business profits as per slabs at different income levels.
The computation of business profits allows deduction of expenses incurred to earn that income. Operating expenses such as brokerage, internet, hardware, and software can be deducted if the income is earned through trading or speculation. However, doing the taxes when you make over a hundred trades in a day can get really tiresome at once. Therefore, we recommend you use a crypto tax tool such as TokenTax or CoinTracking.
Consider Working With A Professional
Even if you arent conducting complex crypto activities, and just have questions about your specific tax obligation or youre unsure if youre reporting correctly, consider working with a tax professional who has experience interpreting tax code related to virtual currencies.;
The IRS and other regulators cannot issue guidance on every situation a taxpayer may run into, and there are plenty of gaps in current guidance. Thats why its important to look for a tax professional familiar with current IRS guidance and has experience reporting cryptocurrency gains and losses, Chandrasekera says. Ask potential tax pros if they own any virtual currency themselves, and make sure they acknowledge the uncertainties in the tax code.;;
There are some gray areas, and thats where CPAs need to come in and say, OK, we dont have direct guidance from the IRS, but when they set up the guidance, this was the intention, Chandrasekera says. As CPAs, we should be able to use our experience and our overall knowledge about the tax code and apply those rules to the unique cases that we see.
You May Like: How To Do Technical Analysis Cryptocurrency
What Are The Tax Implications Of Donating Gifting Or Inheriting Cryptocurrencies
Cryptocurrency donations are treated in a similar fashion as cash donations. They are tax-deductible. An appraiser will assign a fair market value for the coin based on its market price at that time. The donor is not required to pay any taxes on the price gain. Gifts of cryptocurrency below $15,000 are not subject to income. If the recipient of a crypto gift over $15,000 decides to sell the gift, then their cost basis remains the same as that of the donor. Inherited crypto assets are treated the same way as other assets, meaning they are subject to the same estate regulations as other assets.
What If I Spent My Bitcoin At A Retailer That Accepts Cryptocurrency
Spending your bitcoin isn’t all that different from selling it in the eyes of the IRS, especially if your holding has greatly increased in value since you first purchased it. The IRS website states that “the use of virtual currencies to pay for goods or services . . . generally has tax consequences that could result in tax liability.”
If you purchased one bitcoin for $3,000 last March and then used the same coin now worth more than $50,000 to pay for a Tesla this week, you have to report capital gains on the transaction.
“What you’ve got there is a $47,000 capital gain,” Losi explains. “The IRS is going to look at what the fair value of the coin is at the date of exchange and compare that to your tax basis, which is the date at which the bitcoin was acquired.”
That means that unless you earn less than $40,000 a year, you can expect a tax hit on any item you purchased with your crypto.
Also Check: How To Buy Crypto Assets
Capital Gains Vs Capital Losses
Heres some good news for crypto taxes: You only owe taxes if you spend or sell it and realize a profit. If you sell or spend your crypto at a loss, you dont owe any taxes on the transaction.
If you bought $10,000 in Bitcoin and sold it for $13,000, for example, your taxable gain would be $3,000. But if you sold the same Bitcoin for $7,000 youd owe nothing in taxesand could even use part of your $3,000 in Bitcoin losses to offset other investment gains.
Irs Treatment Of Cryptocurrency
The IRS addressed the taxation of cryptocurrency transactions in Notice 2014-21, which provides that cryptocurrency is treated as property for federal tax purposes. Therefore, general tax principles that apply to property transactions must be applied to exchanges of cryptocurrencies as well. Notice 2014-21 holds that taxpayers must recognize gain or loss on the exchange of cryptocurrency for cash or for other property. Accordingly, gain or loss is recognized every time that cryptocurrency is sold or used to purchase goods or services. How the gain or loss is recognized depends largely on the type of transaction conducted and the length of time the position was held.
Read Also: How To Launch Crypto Coin
Purchasing Crypto With Dollars
Simply buying virtual currency with U.S. dollars and keeping it within the exchange where you made the purchase or transferring it to your personal wallet does not mean youll owe taxes on it at the end of the year.;
If your only crypto-related activity this year was purchasing a virtual currency with U.S. dollars, you dont have to report that to the IRS, based on guidance listed on your Form 1040 tax return.
How Is Cryptocurrency Acquired Or Generated
Cryptocurrency can be generated in the following ways:
- Mining: Mining crypto is when an individual miner uses computing technology to solve complicated algorithms/codes/equations and record data on the blockchain. In exchange for this work, one may receive payment in new crypto tokens.
- Buying: Buying it from currency exchanges using real currency and storing it in an online currency wallet in digital form.
- As legal tender: It can be used as a consideration for sale of goods and services, instead of real currency.
Don’t Miss: How Do Crypto Futures Work
How Is My Cryptocurrency Taxed
When you dispose of cryptocurrency, it will be subject to capital gain/loss. In general, it is calculated by using the proceeds less the total cost basis of the crypto.
Crypto.com Tax supports users who are engaging in cryptocurrency transactions for investment purposes only. Users participating in cryptocurrency transactions that constitute business activities cannot apply these calculations for the United Kingdom capital gain tax. Therefore, this may not be the right tool for you if your crypto transactions constitute business activities as opposed to hobby transactions.
Tax Implications Of Airdrops And Hard Forks
The latest IRS guidance states that taxpayers must recognize ordinary income based on the fair market value of new tokens received in both airdrops and hard forks. Airdrops are taxable in the same way whether theyre the result of a previous hard fork or marketing efforts.
You must report this income on Form 1040 as other income. The transactions dont need to go on Form 8949, where you report your short-term and long-term capital gain from cryptocurrency investments.
Taxbit can help you tag tokens as airdrops and hard forks to make it easier to report these as ordinary income instead of capital gains.
Don’t Miss: How To Accept Crypto Payments
Calculate Your Crypto Gains And Losses
Every time you dispose of your cryptocurrency, youâll incur capital gains or capital losses. These disposal events include, but are not limited to:
- Selling your cryptocurrency for fiat
- Trading your cryptocurrency for another cryptocurrency
- Buying goods and services with cryptocurrency â
To calculate your gain or loss from each transaction, youâll need to track how the price of each one of your assets changed from the time you originally received them.
Hereâs a formula you can use:
Then, your capital gains and losses for your relevant cryptocurrency transactions should be reported on Form 8949.
What Are The Tax Implications When A Blockchain Undergoes A Hard Fork Or Cryptocurrencies Are Dropped
Hard forks of a cryptocurrency occur when a blockchain split occurs, meaning there is a change in protocols. A new coin, with differences in mining and use cases from its predecessor, is created. Holders of the original cryptocurrency may be given new coins. This practice is also known as an airdrop and is also used as a marketing tactic by developers of new coins to induce demand and usage.
Previously, there were several questions swirling around the tax implications of hard forks and airdrops. For example, should they be treated as stock splits or dividends? Is an airdrop free income?;;;
In a 2019 ruling, the IRS clarified that hard forks do not result in gross income, if the wallet holder does not receive units of cryptocurrency. Airdrops, on the other hand, qualify as gross income after the holder receives units of a new cryptocurrency either after a hard fork or by marketers of a coin. In the latter case, the quantity and time at which a crypto wallet holder receives the new coins determines the tax amount. Airdrops are taxed as ordinary income.
Also Check: How To Get Started With Blockchain