Taxes On Crypto In The United Kingdom
Cryptocurrencies traded on exchanges are treated as commodities. Taxes are imposed on trade, mining, as well as the sale of goods and services for digital assets, loans secured by cryptocurrencies, and staking when it comes to companies. The tax depends on income/expenses and net income. Private or home mining is tax-free.
The Bottom Line: How To Prepare For The Tax Season
Now that we have discussed everything about how crypto taxes work, we must understand how to prepare ourselves for the tax season.
Here are some of the important things you need to know when preparing your crypto taxes:
- Record all your crypto activities: You must keep a detailed record of all the crypto transactions you make, including buying, trading, airdrops, and every taxable event as mentioned in the list above.
- Calculate your capital gains and losses: Now that you have a record of all your crypto activities, you can manually calculate your gains and losses, or take the help of a number of services and tax calculators to estimate your taxes.
- Filling your tax documents and forms: There are various tax forms for various types of transactions. For reporting your cryptocurrency capital gains or losses you have to file Form 8949 and attach it to Schedule D form, which is the primary tax form for overall taxes.
For crypto income taxes you must file Schedule 1 Form 1040 and in case of self-employed crypto earning, you must add Schedule C.
- Submit forms and pay taxes: Now that you have calculated and filed all your tax documents, all you need to do is submit these forms and pay your taxes on time, unless you want to file for an extension. In that case, you must file for an extension before October 15, 2021.
Yes, crypto mining is also taxable on the basis of the cryptos fair market value at the time of mining.
If Your Bitcoin Is Stolen Tough
Being robbed is bad enough, and previously if youd been swindled of your bitcoins, you might have been able to deduct it as a theft loss on your taxes. However, the new tax rules do away with the deduction for personal theft losses.
Another tax rule doesnt look favorable for owners of digital currency, either. The IRS allows owners to trade many kinds of property for a similar kind of property without immediately incurring a tax liability its called a like-kind exchange.
Before the tax law changes, bitcoin owners wanted to know whether they could engage in like-kind transactions with other cryptocurrencies. The answer was unclear, Harris says. What was unclear was whether one crypto was like-kind to another. Now the new tax reform has limited like-kind exchanges to real property, not personal goods.
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Do You Have To Pay Taxes On Cryptocurrency Profits
Cryptocurrencies have been in the headlines recently as Bitcoin prices reached all-time highs in 2021. They’re also beginning to be a bigger part of the financial portfolios of consumers, investors and large companies alike. And, more merchants may be willing to accept your cryptocurrencies as payment for goods and services in the coming years.
Before you dive into cryptocurrencies feet first, however, you want to understand the tax implications of buying, selling and using them. Even if you don’t receive any tax forms, the IRS requires you to report your cryptocurrency gains or losses.
Are Cryptocurrencies Taxed Like Stocks
The short answer is yes. They are taxed at the same rate and with the same general criteria. Just like equities or other assets, taxpayers can donate cryptocurrencies to tax-exempt charities or give them as gifts with no liability.
Even so, there is one major difference between cryptocurrencies and stocks: Digital tokens can be used to buy goods and services. Lest we forget, Bitcoin was introduced in 2009 as an alternative form of money. Thereâs a whole panoply of things investors can buy with the token and others such as Ethereum or Litecoin. They run the gamut from real estate to works of artâ Sothebyâs recently started accepting Bitcoin and Ether as payment for non-fungible tokens â to trips on Virgin Galacticâs space flights. And, of course, investors can use crypto to buy a beer and a pizza at any number of Bitcoin-friendly cafes. Thatâs something they canât do with shares of Walmart.
So what does that mean? Well, as soon as a consumer pays for something with cryptocurrency theyâve just cashed in a taxable asset. Thatâs how the IRS sees it. âIn general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability,â the agency states in a notice.
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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.
Defi Trading As An Individual
As we already said, the tax treatment of your DeFi investments is all going to come down to whether the CRA view you as an individual investor or see your crypto investments as more similar to business income. They decide this on a case-by-case basis – but if you’re seen to be trading as an individual, you’ll pay Capital Gains Tax on any profits, not Income Tax.
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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.
Valuing Cryptocurrencies Either As Capital Property Or Inventory
To file your income tax return, you need to know how to value your cryptocurrencies. This depends on whether they are considered capital property or inventory. When cryptocurrencies are held as capital property, you must record and track the adjusted cost base so that you can accurately report any capital gains.
If the cryptocurrencies are considered to be inventory, use one of the following two methods of valuing inventory consistently from year to year:
- value each item in the inventory at its cost when it was acquired or its fair market value at the end of the year, whichever is lower
- value the entire inventory at its fair market value at the end of the year
You might have to use other methods of valuing inventory, depending on the type of business you have. For example, property described in the inventory of a business that is an adventure or concern in the nature of trade must be valued at the cost you acquired the property for.
You will have to compare the cost and the fair market value of each item to figure out which is lower. You then use the lower figure for each item to calculate the total value of your inventory at the end of the year.
“Cost” as used in the phrase “cost at which the taxpayer acquired the property,” means the original cost of the particular item of inventory , plus all reasonable costs incurred to buy that particular block of cryptocurrency.
Use the same inventory method from year to year. Please review our archived page on inventory .
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I Sold My Bitcoin In 2020 How Much Do I Owe
It depends on how long you held the bitcoin and whether you sold it for a profit or a loss. If you owned your bitcoin for more than a year, you will pay a long-term capital gains tax rate on your profit, which is determined by your income. For single filers, the capital gains tax rate is 0% if you earn up to $40,000 per year, 15% if you earn up to $441,450 and 20% if you make more than that. This IRS worksheet can help you do the math.
If you owned your crypto for less than 12 months, the taxes you pay will be the same as your normal income tax rate.
If you sold your crypto for a loss, there’s some good news. “What people don’t always remember is that if you sell it, and you lost money, that’s a write-off of the amount you lost,” Weiss says. “It’s important that people look for not just where they made money, but also where they lost money.”
You can use your losses to lower your taxable income by a maximum of $3,000 and can carry over any additional losses to future years.
Reporting As Either Income Or Capital Gain
Generally, if disposing of cryptocurrency is part of a business, the profits you make on the disposition or sale are considered business income and not a capital gain. Buying a cryptocurrency with the intention of selling it for a profit may be treated as business income, even if its an isolated incident, because it could be considered an adventure or concern in the nature of trade.
If the sale of a cryptocurrency does not constitute carrying on a business, and the amount it sells for is more than the original purchase price or its adjusted cost base, then the taxpayer has realized a capital gain.
Capital gains from the sale of cryptocurrency are generally included in income for the year, but only half of the capital gain is subject to tax. This is called the taxable capital gain. Any capital losses resulting from the sale can only be offset against capital gains you cannot use them to reduce income from other sources, such as employment income. You can carry forward your capital losses if you do not have any capital gains against which to offset those losses for the year or any of the preceding three years.
For more information on capital gains, see Guide T4037, Capital Gains.
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How Is Crypto Income Taxed
Crypto income is taxed as ordinary income at its fair market value on the date the taxpayer receives it.
Here are the most common examples of what’s considered crypto income:
- Receiving crypto as payment for providing a service
- Staking crypto and earning rewards
- Lending crypto and receiving interest payments
Business Income Or Capital Gain
The CRA states that they decide what is business income and what is a capital gain on a case by case basis. They also state that an individual transaction may be considered business income, while other transactions by the same investor may be considered a capital gain. All this to say, it’s not too clear what precisely the CRA consider business income.
They do have some guidance on this. The CRA states the following are common signs that you may have business income:
- You conduct crypto activity for commercial reasons.
- You promote a product or service.
- You show that you intend to make a profit.
- Your crypto activities are regular or repetitive.
With the above in mind – many Canadian crypto investors could be considered to be making business income as opposed to a capital gain. Their own example of business income is of a crypto investor who buys and sells crypto on a regular basis and makes a profit of $40,000 through active trading of cryptocurrency.
The more active you are in crypto trading and the more profit you make increases the likelihood of your crypto profits being considered business income as opposed to capital gains. You should speak to an experienced crypto tax accountant for bespoke advice on your investments and their subsequent taxation, but we can look at the general rules on how business income and capital gains from crypto are taxed in Canada.
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How To Pay Your Cryptocurrency Taxes And Stay Out Of Irs Trouble
Cryptocurrencies like Bitcoin and Ether have gained a lot of traction over the last several years. However, crypto regulations are notoriously vague, particularly in regard to cryptocurrency taxes. Some crypto traders even found themselves in trouble with the IRS for unintentionally violating tax laws. Last year, the IRS began a highly-public crackdown on Crypto tax evasion, so following the rules is more important than ever before. Heres what you need to know to stay on the governments good side.
Is Crypto Taxed Like Stocks
Crypto is taxed like stocks and other types of property. When you realize a gain after selling or disposing of crypto, you’re required to pay taxes on the amount of the gain. The tax rates for crypto gains are the same as capital gains taxes for stocks.
Part of investing in crypto is recording your gains and losses, accurately reporting them, and paying your taxes. Like every investor, you want to keep this tax burden to a minimum. In closing, let’s look at a few effective ways to minimize crypto taxes:
- Hold successful crypto investments for more than one year before selling or using them. Tax rates on these long-term gains are lower than rates on short-term gains.
- Use tax loss harvesting. If you’ve had gains and losses on different types of cryptocurrency, you can sell both and use the losers to offset your gains.
- Consider opening a crypto IRA. Like other IRAs, this type of account lets you make tax-deductible contributions and only pay taxes when you withdraw funds.
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Do You Have To Pay Taxes On Uniswap Trades
If you trade crypto on Uniswap, youll have taxable events on each token swap. Those crypto-to-crypto trades on Uniswap are taxable events, subject to capital gains taxes.
On Uniswap, you can do more than token swaps. For example, provide liquidity to a trading pair. However, the tax implications of liquidity mining and trading tokens are different. Check our Uniswap taxes guide to clarify any questions.
Crypto Mining Tax Canada
The CRA guidance on crypto mining tax all revolves around the scale and intentions of your crypto mining activities. If you’re seen to be acting as an individual, you’ll only pay Capital Gains Tax when you dispose of mined crypto. If your mining is more akin to business income, you’ll pay Income Tax instead.
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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.
Why Crypto Exchanges Can’t Provide Accurate Tax Forms
This is where a big problem exists within the crypto tax space.
Cryptocurrency exchanges like Coinbase, Binance, and others do not have the ability to provide their users with accurate capital gains and losses tax reports. This is not a fault of the cryptocurrency exchange itself, it is simply a product of the unique characteristics of cryptocurrenciesânamely their transferability.
Because users are constantly transferring crypto into and out of exchanges, the exchange has no way of knowing how, when, where, or at what cost basis you originally acquired your cryptocurrencies. The exchange only sees when crypto appears in your wallet.
The second you transfer crypto into or out of an exchange, that exchange loses the ability to give you an accurate report detailing the cost basis and fair market value of your cryptocurrencies, both of which are mandatory components for tax reporting.
As you can see pictured below, Coinbase themselves explains to their users how their generated tax reports wonât be accurate if any of the below scenarios took place. This affects over two thirds of Coinbase users, which amounts to millions of people.
You can read more about the âcrypto tax problemâ in our blog post: Why Exchanges Canât Report Crypto Taxes.
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