Key Takeaways
- In some countries, cryptocurrencies are considered property for tax purposes, and as such, capital gains taxes from selling or trading them may apply.
- The amount of crypto tax can vary depending on the country of residence.
- Failure to report crypto tax is considered fraud in most countries and could result in prosecution, either through fines or arrest.
This guide explains and breaks down everything you need to learn about crypto tax and everything you need to do to remain compliant and report your taxes correctly.
Do You Need To Pay Taxes On Crypto?
The requirement to pay crypto tax largely depends on the laws and regulations applicable in a user’s country. Cryptocurrencies are considered property in most countries for taxation purposes, and capital gains tax is therefore applicable whenever you sell or trade digital assets. Since tax laws can change rapidly, you want to stay updated on specific tax laws in your jurisdiction or consult with an expert.
How to Track Gains, Losses, and Deductions
The procedure for paying crypto tax can vary from one country to another, depending on the applicable law. However, the process mainly involves reporting taxable digital asset transactions as income or capital gains. While the procedure will depend on your jurisdiction or transaction type, the general outline would be as follows:
Keep Records: Keep a detailed record of all your crypto transactions, including the date, type of transaction, and cost basis.
Determine Taxable Events: Determine which of your transactions are taxable—this could mostly involve selling, trading, or exchanging crypto for fiat currencies.
Calculate Income: Calculate the gains or losses for each taxable event to determine any capital gains by deducting the cost basis from the sale proceeds. You should subtract the purchase price from the sales price to determine capital losses.
Report Income on the Tax Return: For taxation purposes, report any income, gains, or losses based on your transaction details, which may include filling out the relevant forms or schedules based on your jurisdiction.
Pay the Tax Owed: If you owe any crypto tax, remit the amount to the tax authority in your jurisdiction.
What Happens If You Don’t Report Crypto Taxes?
The consequences for failing to report crypto tax, incorrect filing, or not declaring all taxable income will depend on your jurisdiction. However, it is considered fraud in most countries and could lead to penalties like fines or arrests. The crypto tax could apply in some countries even when you don’t receive fiat currency since crypto-to-crypto trades are still considered a taxable event subject to capital gains tax. While many tax authorities guide crypto tax, some investors struggle to understand their tax obligation clearly. It is, therefore, necessary for you to seek professional advice to have a clear understanding.
Best Tax Software and Tips to Minimize Your Tax Bill
Tax software is one of the best ways to determine how much crypto tax you owe. While there are many different kinds of software to choose from, you want one that enables you to track your transactions quickly and has a great user experience based on your wallet type. According to most reviews, some examples of the best crypto tax software include Koinly, Accointing, Taxbit, BearTax, Cointelli, and CoinTracker.
Even though it’s almost impossible to evade crypto taxes, there are practical strategies you can employ to minimize your tax bill legally. Some of the strategies include:
Harvest your losses: This refers to intentionally selling crypto at a loss to reduce the tax burden.
Invest for the long term: You can reduce your tax burden by waiting at least one year or longer before selling your digital assets since the capital gains tax on your profits will be lower.
Take profits in a Low-Income Year: Consider taking your crypto earnings when your annual income is relatively lower to lower your crypto tax rate.
Give Cryptocurrency Gifts: You could also avoid or reduce your crypto tax obligations by giving away digital assets as a gift because that isn’t considered a taxable event in many jurisdictions.
Conclusion
The entire digital asset system is still in its infancy, but the industry is evolving, meaning that rules and regulations can be updated as needed. While preparing paperwork for crypto tax purposes may look complex, you can simplify your work by keeping constant records and using crypto tax software as much as possible. Don’t hesitate to contact an expert any time you are in doubt.
