All About Capital Gains Taxes
No matter what, the government requires you to pay taxes on your capital gains. If you’re more aware of how capital gains are taxed and how your other income impacts their tax rate, you can plan better and keep more of your investment gains. Minimizing the taxes on your investments could help you reach your financial goals a lot sooner, so it pays to know about capital gains taxes.
Strategies For Minimizing Capital Gains Tax On Stocks
There are several strategies you can use to minimize your capital gains taxes.
Where To Buy All Types Of Cryptocurrency
With so many cryptocurrencies out there right now, there is no single place that grants access to all of them. However, Coinbase is one of the largest trading platforms and currently supports 50 cryptocurrencies . Binance is another top trading platform and is where Binance Coin and tokens can be traded.
If you’re looking to buy company stock and cryptocurrency from a single place here are the apps worth checking out:
These trading apps don’t support all account types like a full-service stock broker, but they have lots of functionality that combines basic crypto and stock trading with digital banking capabilities.
This is just the tip of the cryptocurrency iceberg. There are thousands of different digital currencies utilizing blockchain technology being used for an incredibly diverse list of applications within the digital economy. Bitcoin is far and away the most popular crypto because it has picked up momentum among a young generation of consumers, but developers are always innovating new blockchain tech and uses for it. These developments give other platforms such as Ethereum a lot of value as they get put to use building new software. For investors trying to peer into the future, that could hold a lot of appeal since decentralized blockchain could erase third parties from business transactions and make payments around the world more efficient.
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Cryptocurrencies And Taxes: What You Should Know
What began in 2009 with a single virtual currencyBitcoinhas grown to comprise some 16,000 cryptocurrencies totaling more than $2.4 trillion in assets.1 But know this: All that virtual activity has real-life tax consequences.
“If you make money on a cryptocurrency transaction and don’t report the income, you could be in hot water,” says Hayden Adams, CPA, CFP®, director of tax and financial planning at the Schwab Center for Financial Research.
Let’s look at how cryptocurrencies are taxedand how to avoid running afoul of the IRS.
Tax On Lost Or Stolen Crypto
The CRA has not released specific guidance stating whether you can claim lost or stolen crypto as a capital loss. However, they do allow taxpayers to deduct capital losses due to theft of other capital assets. So there is a good chance the same rules may apply to cryptocurrency.
Because Canada use the adjusted cost basis method – it is highly likely you would only be able to claim your original investment as a loss, not the fair market value of the asset at the time it was lost or stolen. This is easier to understand with an example.
Let’s say you were very clever and bought Bitcoin back in 2017 for $900. You then forgot about it entirely for a couple of years and now you’ve realized in 2021 that your 1 BTC is worth $70,000! But you’ve also lost your private keys and have no means of finding or restoring them. You may be able to claim this as a capital loss with the CRA – but you’ll only be able to claim $900 as your capital loss, not $70,000.
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Crypto Asset Management: Managing The Tax Expectations Gap
In the past few years, we have witnessed an exponential growth of both interest and investment in digital assets and cryptocurrencies. New players have launched related funds and investment vehicles. Established investment management funds are also exploring this new frontier.
But the tax rules governing this space are not fully established. The Internal Revenue Service has yet to issue full guidance on how these assets are to be taxed or how to specifically classify them. So players in this space need to proceed with caution.
Your specific circumstances will inevitably shape the contours of your approach to these tax issues. But there are some important IRS guideposts that offer direction and help narrow the expectations gap. Weve sketched out some of the key issues that warrant your attention when dealing with taxes on crypto assets.
Bitcoin And Other Cryptocurrencies Are Property
In 2014, the IRS issued a notice declaring that for tax purposes, cryptocurrency is property, not currency. That may sound like a trivial distinction, but in this case its the basis for when the IRS decides whether individuals owe taxes.
These bitcoin tax consequences revolve around what the government agency calls a realization event. Here’s how it boils down:
If you acquired a bitcoin from mining, that value is taxable immediately no need to sell the currency to create a tax liability.
If you disposed of or used bitcoin by cashing it on an exchange or buying goods and services, you will owe taxes if the realized value is greater than the price at which you acquired the bitcoin. You may have a capital gain thats taxable at either short-term or long-term rates.
Many people think that theres no tax consequences when they sell an object its for personal use and theyre expecting to lose money on it anyway, whether it be a car, an appliance or another piece of property, says Brian R. Harris, a tax attorney at law firm Akerman LLP in Tampa, Florida. Many people arent in the mind-set of holding tangible objects for investment and then recognizing gains when they ultimately sell them.
But if theres been a gain from the bitcoin owners cost basis, theres a tax liability, he says.
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Cryptocurrency Mining Tax Tips
The question of whether an individuals mining activities is business or a hobby is both complicated and important. It is complicated because it requires knowledge of the Canadian tax case law covering this question and because it is very dependant on the specific circumstances of the individual miner. This means that obtaining proper legal advice from expert Canadian income tax lawyers is essential. It is important because individuals who realize large gains selling NEO or other cryptocurrency they obtained through mining will significantly reduce their tax payable if they can characterize the gain as a capital gain and not business income. Under ordinary circumstances, it is unlikely that a hobby could produce large gains, but the sharp increase in value in Bitcoin and some other cryptocurrencies over the last few years has resulted in significant unanticipated gains for hobbyists. In some circumstances it may be possible for commercial miners to segregate some of the coins they have mined into a long term portfolio and credibly claim that those coins underwent a change in use from inventory to capital property. This would mean that gains from disposing of these coins would be capital gains not business income and considerable tax savings. Commercial miners who are not holding on to their coins for the long term should consider incorporating to gain access to lower rates on active business income through the small business deduction.
How To Prepare For Tax Season When You Have Crypto
The best thing you can do to simplify your crypto-related 2021 tax filing is start planning ahead now. Dont wait until April 1, 2022, to begin gathering your reports and figuring out what you owe, even if thats how you typically approach tax season.
You do not want to be in the situation on April 14 where youre trying to catch up with one years worth of crypto activity, White says. You really want to treat it more like a business, where on a monthly basis you are making sure that all of your taxes are up to date, making sure you are tracking things correctly, being more proactive about it.
If youre just dipping your toes into trading Bitcoin or another cryptocurrency, and only have a few transactions , you may be able to easily report your crypto earnings yourself using your typical tax software.
Most people are pretty simple: they have a W-2, they have a couple 1099 interest forms, and they may have some crypto, Chandrasekera says. So those people dont really need a CPA. But if youre somebody dealing with large amounts of money, youre making DeFi transactions, staking or mining operations, those people will want to have a CPA to sit down and do tax planning and tax-saving strategies.
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The Irs Classifies Virtual Currencies As Property What Does That Mean
Under U.S. tax law, bitcoin and other cryptocurrencies are classified as property and subject to capital gains taxes. But you only owe taxes when those gains are realized.
Just because your Coinbase portfolio drastically grew in value last year doesn’t mean that you’ll be writing out a check to Uncle Sam come April. Similar to trading stocks, you only need to list gains you earn from bitcoin as income when you decide to sell.
“If you never sell your bitcoin, you never owe cash,” Ben Weiss, COO of CoinFlip, the largest Bitcoin ATM provider in the country, tells CNBC Make It. “Bitcoin is treated like if you bought and sold a stock.”
The Challenge For Crypto Traders
As you can see from the examples above, calculating your capital gains and losses from your crypto trading activity requires records to keep track of your cost basis, fair market value, and USD gain or loss every time you dispose of a crypto .
Without this information, you arenât able to calculate your realized income from your trading activity, and you arenât able to report it on your taxes.
This is extremely challenging for many cryptocurrency investors as most havenât been keeping detailed records of their investing activity. Trying to track the cost basis and USD prices for all of their cryptos across all of their exchanges, wallets, and protocols at any given time quickly turns into a difficult, if not impossible, spreadsheet exercise.
This is the reason why hundreds of thousands of crypto traders are turning to crypto tax software like CoinLedger to automate all of their crypto tax reporting. You can sign up for a free account here.
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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.
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.
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Exchanged For Other Cryptocurrencies
Taxpayers who make coin-to-coin trades may mistakenly assume there is no tax liability because they did not receive any actual funds. Given the IRSs treatment of cryptocurrency as property, however, cryptocurrency trades are subject to the same capital gains and losses rules as all other property exchanges.
Some taxpayers and preparers have attempted to delay capital gains income on cryptocurrency-to-cryptocurrency trades by classifying the trades as Internal Revenue Code section 1031 like-kind exchanges, whereby they can defer income to the replacement positions cost basis. Prior to the Tax Cuts and Jobs Act of 2017 , it was possible to argue that cryptocurrency could qualify, but there were inherent problems in the applicability of IRC section 1031 to these trades, since they may have failed to meet certain requirements. For example, the currencies are not necessarily like-kind properties. In addition, reporting such trades under IRC section 1031 must be done properly, using Form 8824 and listing every trade. The TCJA made this debate moot by limiting 1031 like-kind exchanges to real property, not for sale starting with tax year 2018, therefore, this treatment of cryptocurrencies will no longer be even theoretically viable.
This Guide Is Regularly Updated
One quick thing before we jump into it – the rules on crypto tax in Canada are in constant flux. At Koinly, we keep a very close eye on the CRA’s crypto policies and regularly update this guide to keep you informed and tax compliant.
7th December 2021: New year, new guide for 2022!
1st April 2021: Koinly now connects to crypto exchange Coinsquare.
25th March 2021: Coinsquare ordered to release customer records to CRA.
10th November 2020: CRA announces 2021 filing deadline as 30 April 2021
5th March 2019: Welcome to your Canada cryptocurrency tax guide!
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What Is The Importance Of Cryptocurrency And Is It Safe
The most-loved feature of cryptocurrency is its very basic concept: being a decentralized form of currency. Owning a currency that is not controlled by any central authority provides an excellent alternative to the way we currently conduct our monetary system.
Transactions involving cryptocurrency take place on a public ledger called a blockchain. The ledger functions as a middleman that ensures all transactions are fair and free from double-spending. This ledger is protected by strong cryptography which keeps all transactions safe.
Having said that, it must be noted that even though cryptocurrency is a decentralized system, there are crypto taxes in the US that you need to be aware of. This crypto tax guide will go over everything you need to know about how cryptocurrency is taxed and how to properly calculate them.
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Q: How Does The Irs Audit Bitcoin And Other Cryptocurrency Investors
Currently, the IRS appears to be focusing its auditing efforts on cryptocurrency investors whose identities were released pursuant to the Coinbase subpoena. However, we expect the IRS to expand the scope of its cryptocurrency audits in the future and, if you own cryptocurrency in the past, then a normal tax audit could involve scrutiny of your cryptocurrency-related holdings and transactions as well.
Example : Capital Gain Or Loss
Tim found a deal on a living room set at an online vendor that accepts Bitcoin. Tim acquired $3,500 worth of Bitcoin to buy the furniture with. By the time he bought the furniture and converted his remaining Bitcoin back into dollars, the value of Tims Bitcoin had increased by $500. The gain realized by Tim was on account of capital, so Tim has to report a $500 capital gain on his income tax return. However, only 50% of that capital gain is taxable.
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Are There Serious Tax Implications To Investing In Cryptocurrencies Such As Bitcoin
Cryptocurrency investors need to be aware that failing to report income and pay tax on cryptocurrency investment returns can have severe tax implications. For federal income tax purposes, cryptocurrency holdings are treated similarly to other more-traditional types of investments. If you realize gain when you sell a stock, that is a taxable event. The same holds true when you sell cryptocurrency. As a result, if you have failed to report taxable cryptocurrency transactions to the IRS, then you could be at risk in the event of an IRS audit or a criminal cryptocurrency tax fraud investigation.
What kind of risk are we talking about? Whenever you fail to timely pay tax to the IRS, you are liable for back taxes, interest and percentage-based penalties. If you have been buying and selling cryptocurrency for years, your aggregate liability could be substantial. Furthermore, if there is evidence to suggest that you have knowingly evaded your federal tax obligations , then you could also be at risk for being indicted on charges of criminal tax fraud.