By any reckoning, Bitcoin is an asset, and so are other cryptos. It’s no wonder that governments around the world are asking their citizens to mention any cryptocurrency gains while filing their taxes. But just like with any other cryptocurrency-related question, different countries take different approaches. In fact, the regulations vary so drastically that in the search for a better bargain some people even change their citizenship. But let’s get back to this later and first take a look at what’s happening with crypto taxes in the US.
Crypto Taxes in the USA
The US initially published its guidance on crypto taxes in 2014, but it was not particularly comprehensive. Later on, in 2019, the IRS (Internal Revenue Service, a government agency responsible for the collection of taxes) released a new, more detailed version of the document. Although some questions are still left unanswered, the general idea about how to count your Bitcoin for tax purposes is clear.
What Activities are Subject to Bitcoin and Other Crypto Taxes?
Before you reach for a calculator, let’s establish what events are subject to tax. According to the IRS guidelines, the following activities are taxable:
- Exchanging Bitcoin and other cryptocurrency to fiat
- Trading crypto to crypto
- Paying for goods and services with Bitcoin and other crypto
- Earning Bitcoin and other cryptocurrency including mining, airdrops, and hardforks
However, if you wish to gift your Bitcoin or simply transfer it between the wallets, you don’t need to file it for taxes. Same goes for buying crypto with fiat money, you can then hold it as long as you want and forget about taxes until the moment you decide to exchange it back to fiat. And then the tax percentage will also vary depending on the amount of time you’ve been holding your crypto.
The most important thing is to keep records of all your operations because nobody will do that for you. Although some exchanges do offer you reports for tax purposes, there are few of them and you shouldn’t always count on that.
Now, once that’s clear, let’s get to the math.
Determining Your Capital Gain or Loss
Whenever you make money, the government usually asks for a share (unless you’re dealing with crypto in Portugal, but that’s a whole different story). So if back in the day you were one of the lucky ones who bought Bitcoin for $100 and now sold it for $8000, we’ve got news for you. First, your capital gain equals $7900 and second, you must file it.
On the other hand, if you bought your Bitcoin when its price was almost $20,000 and then, for whatever reason, sold it all today for $8,000 you’ve clearly incurred a capital loss. But every cloud has a silver lining and you can fill the loss and actually reduce your taxes.
How to Calculate Crypto Capital Gains
First of all, you need to count the total price of your crypto purchases separately for every cryptocurrency that you’ve traded, including the exchange commissions and transaction fees. Then divide this number by the number of coins that you own
Here’s an example. You bought $100 worth of Bitcoin, got 0,013 BTC and also paid a 3% commission fee to the exchange. The formula would look like this: ($100 + $100*3%)/0.013=~7,923 for one Bitcoin. Then simply deduct this number from the sale price of your Bitcoin and you will get your capital gain (or capital loss) that you need to use to count your taxes.
What About the Crypto-to-Crypto Deals?
Things get slightly more complicated when you’re trading crypto for crypto and want to file your taxes accordingly.
In a perfect world, every time you complete a trade you would count your capital gains in fiat. The final number would depend mainly on the sale price of your crypto during the time of the trade. And that’s also why it is really essential to keep records of every single cryptocurrency trade that you’ve made.
For instance, you closed the deal and got $800 (all costs included) for 0,1 BTC. Previously, you bought this 0.1 Bitcoin with $500 worth of Ethereum. This means that you’ve gained $300 that you need to declare.
For occasional investors, the tax calculations should not be a problem as long as they keep track of all their purchases. It’s traders who might experience certain issues. Not only can they make multiple crypto-to-crypto exchanges per day but, obviously, they do this weekly or monthly. And if they don’t provide the relevant numbers to the IRS, in theory, you might get yourself into trouble.
So what should you do?
There are three possible solutions:
- Import your trading data from the exchange you’ve been dealing with and do the rest of the calculations manually by yourself. Keep in mind, that not every exchange allows you to do this and you should always check in advance. Exchanges are unable to provide you with all the calculations as the majority of users transfer their crypto funds back and forth.
- Keep track of your cryptocurrency trades yourself (good old Excel tables might come in handy).
- Use special tools that help you calculate your taxes.
Tools for Preparing Crypto Tax Reports
There are definitely quite a few apps and websites that let you import your crypto trading history from exchanges, fill in your income, and do the calculations for you.
CryptoTrader.tax – allows you to import crypto trading data from 20 exchanges and prepares the reports for you, depending on the plan that you’ve chosen.
TokenTax – works with all mainstream cryptocurrency exchanges and creates all the forms for filing crypto taxes that you possibly need. Often referred to as one of the best options for doing your Bitcoin and crypto taxes.
BearTax – supports over 25 crypto exchanges (including DEXs) and has extended functionality, so you just have to decide how much of the work you’re willing to put in yourself.
Other Things to Consider
Another factor you must consider when preparing your taxes is how long have you been holding your cryptocurrency, and your marital status.
Short-term gains (holding less than a year) should be counted at a marginal tax rate. The number will vary from 10% to 35% depending on total income and marital status.
Long-term gains (holding for more than a year) are a lot more rewarding as the tax fee is significantly lower and the tax rate could even be as low as 0%.
What About Crypto Miners?
If you’re engaged in crypto mining, you need to file two types of reports: one stating the fiat value of the coins that you’ve earned, and the second stating your gains or losses if you’ve eventually decided to trade your crypto to fiat.
How Does One Actually File a Crypto Tax Report?
How Does the Government Know Who Deals with Crypto?
The truth is they don’t. However, they take measures to motivate crypto enthusiasts to file their taxes voluntarily.
One such measure is mailing a questionnaire to those citizens who could potentially deal with crypto. You might be asked to name the crypto that you own, share some information about the hardware you use to store it, etc. Some countries even forced the local cryptocurrency exchanges to provide data on the trades that they executed in order to identify people who deal with crypto.
Another way is adding a cryptocurrency-related question to your regular tax form so in this case it definitely cannot be ignored.
And if these measures don’t work, the authorities can become more persuasive by sending reminders or even warnings to file your crypto taxes in a timely manner. They might even go as far as to monitor your social media accounts and reach out to family members.
What About Crypto Taxes in Other Countries?
Some countries, like Portugal, officially renounced crypto taxes completely:
“The appreciation of cryptocurrencies or any gains on the direct sale of cryptocurrencies are not taxed in Portugal.”
Belarus and Malaysia do not collect capital tax gain either. Moreover, there are quite a few countries that make it easy for crypto holders and if you keep your crypto for at least a year, you’re not required to pay the capital gain tax even if you decide to sell it later on.
What Happens If You Don’t Pay Your Crypto Taxes?
Unless you’re taking some extreme measures like traveling all year round so you’re no longer a resident of any country, we wouldn’t recommend that. In the US, IRS can not only fine you up to $250,000, but you may also face some jail time.
“Taxpayers may be subject to penalties for failure to comply with tax laws.”
You might be inspired by John McAfee’s lifestyle, constantly on the run from the tax collectors and sharing his experiences with the entire world to see, but trust us the romance of this affair fades out quickly.
The Bottom Line
The responsibility of paying your cryptocurrency gains taxes depends on the country of your residence. If your crypto profits are subject to tax, make sure to keep a record of every deal that you make. You can count the taxes by yourself or use a special platform to import your trading data from an exchange.
At the end of the day, it’s up to you to decide whether you’re willing to play by the rules. If you’re not excited about the idea of paying your crypto taxes, but still want to stay within the scope of the law, changing your citizenship might be a good idea. But then again, crypto regulations change almost daily and there are always certain risks involved.