Bitcoin, Cryptocurrency and Taxes: What You Need to Know

If you don’t live in a country where cryptocurrency gains aren’t taxed, you’ll need to figure out how to account for your bitcoin or other cryptocurrency holdings during tax season.

There is a lot of ambiguity around cryptocurrency taxation because governments are still figuring out how to tax it. We need to follow the current laws even though they might be inconvenient, because if we don’t we could end up facing criminal charges.

We will discuss the taxation models for cryptocurrencies in some of the world’s most influential nations to help you understand the current international regulatory spectrum.

Please be aware that this article is designed to provide general information about taxation models for cryptocurrencies globally, and is not a replacement for professional advice. It is advisable to consult with an accountant who is knowledgeable about cryptocurrency taxes in your area.

The Three Main Taxation Models

Most nations make their crypto users submit to one of three fundamental taxation categories:

• Income tax
• Company tax
• Capital gains tax

If you receive Bitcoin or other cryptocurrencies as income, you will have to pay income tax.

Companies that are large and deal with large amounts of cryptocurrency are subject to company tax. An example of a cloud-mining company is Genesis Mining.

Crypto traders who arespeculating with the express purpose of making gains will have to pay capital gains tax. Most nations have different tax rates for short-term and long-term capital gains. The criteria for this split varies between nations.

Tell Me More About Capital Gains

Generally, crypto owners and traders will have to pay capital gains taxes on any gains from their crypto holdings. tax laws for cryptocurrencies are still new, most countries have had capital gains taxes for a while.

The cost basis of a stock trade is the price of the shares, plus any commissions and fees paid. For cryptos, the cost basis is the price of the coins, plus any commissions and fees paid. Cryptos are regarded as something like a commodity for tax purposes, but they are very similar to a currency. When one cryptocurrency is traded for another, the cost basis (the original value of the asset) for both cryptocurrencies must be established in the currency of taxation.

If you were to trade BTC for ETH, the value of both currencies against the US dollar at the time of the trade would act as the cost basis for the trade.

If the value of Bitcoin is $4,000 and the value of Ethereum is $140, then buying one Ethereum would establish a cost basis of $140. The figure mentioned would be crucial to document, as any BTC traded would be taxed if it was bought for less than the price it was sold for. When you decide to trade the ETH that you bought for $140, you will have to pay capital gains tax on the $140.

When you buy or sell cryptocurrencies for government-issued currency, the process is simpler. The cost basis will be calculated in the same currency as the one used to pay taxes.

The most important thing to take away from this is that it is essential to keep accurate records of all transactions.

It may be easier to move in and out of a fiat currency or its equivalent for tax purposes. To establish a cost basis between two cryptos, the transaction dates are extremely important for taxation.

Stablecoins could potentially be used as a substitute for fiat currency for tax purposes, as most of them are stable against the US dollar.

What is a Taxable Event?

The most common taxable event is selling cryptos at a profit. The transfer of cryptocurrency may be a taxable event, depending on the country. If you lose money on a crypto transaction you may be able to lower your taxes, depending on where you live and a few other factors.

A tax professional can tell you more about how taxes could apply to your crypto trading or investments. If you don’t pay your taxes, most countries will penalize you severely, so it’s a good idea to get some help before you end up owing even more money!

Now, let’s shift to specific national taxation approaches.

Cryptocurrency’s rise and appeal as an alternative payment method

The interest in cryptocurrency has increased a lot in recent years. No matter what your involvement with cryptocurrency is, it’s important to understand the tax implications.

While cryptocurrency can be used to buy goods and services, many people invest in it like they would invest in stocks. One aspect that makes cryptocurrency attractive is that it is a decentralized medium of exchange, which means it does not require the involvement of banks, financial institutions, or other central authorities such as governments.

Cryptocurrency has built-in security features. The transactions are encrypted by specialized computer code and then recorded onto a blockchain. A blockchain is a public, distributed digital ledger that requires every new entry to be reviewed and approved by all network members.

You may have heard of Bitcoin or Ethereum as two of the more popular cryptocurrencies, but there are thousands of different forms of cryptocurrency worldwide.

Do you pay taxes on crypto?

Cryptocurrency is not considered a true currency by the IRS. According to IRS Notice 2014-21, the IRS classifies cryptocurrency as property. Capital gains and losses from cryptocurrency transactions need to be reported on Schedule D and Form 8949 if necessary.

Despite the decentralized, virtual nature of cryptocurrency, the IRS treats it like property, which means your gains and losses in crypto transactions will typically affect your taxes.

How is crypto taxed?

If you don’t hold crypto in a retirement account, you may have to pay capital gains or losses on it. The amount of time you held the cryptocurrency will determine if your gain or loss is considered short-term or long-term by the IRS.

• If you owned the cryptocurrency for one year or less before spending or selling it, any profits are typically short-term capital gains, which are taxed at your ordinary income rate.
• If you held the cryptocurrency for more than one year, any profits are typically long-term capital gains, subject to long-term capital gains tax rates.

For short-term capital gains or ordinary income earned through crypto activities, you should use the following table to calculate your capital gains taxes:

2021 Short-Term Capital Gains Tax Rates

If you held your cryptocurrency for more than one year, calculate your long-term capital gains using the following table.

2021 Long-Term Capital Gains Tax Rates

The way you report cryptocurrency on your tax return is determined by how you acquired it and what you used it for.

You can also earn income related to cryptocurrency activities. This income will be taxed at your marginal tax rate, which could be between 10 to 37%.

How to calculate capital gains and losses on crypto

There are two types of gains and losses from buying and selling capital assets: long-term and short-term. There are two different tax consequences you will encounter depending on which class the IRS puts you in.

1. Short-term capital gains and losses come from the sale of property that you held for one year or less. These gains are typically taxed as ordinary income at a rate between 10% and 37% in 2021.
2. Long-term capital gains and losses come from the sale of property that you held for more than one year and are typically taxed at preferential long-term capital gains rates of 0%, 15%, or 20% for 2021.

Your cost basis is the original purchase price of your property, plus any improvements you made, minus any depreciation you deducted. This is the price you paid, which you would adjust by adding any fees or commissions you paid to engage in the transaction. This final cost is called your adjusted cost basis.

Next, you determine the sale amount and adjust (reduce) it by any fees or commissions you paid to close the transaction.

Finally, you subtract your adjusted cost basis from the adjusted sale amount to determine the difference, resulting in a capital gain if the amount exceeds your adjusted cost basis, or a capital loss if the amount is less than your adjusted cost basis.

If you want to find out how much tax you could potentially owe from your cryptocurrency activities, you can use a Crypto Tax Calculator. This will give you an estimate of any capital gains or losses you might have.

Buying or selling cryptocurrency as an investment

Buying cryptocurrency isn’t a taxable event by itself. You will not have to pay taxes on your cryptocurrency if you choose to hold it for a long time, even if the value of your position increases.

If you make a profit from selling, trading, or disposing of cryptocurrency, you will need to pay taxes on that gain. The tax implications of trading cryptocurrency in an IRA are different than if you were to trade it in a regular, taxable account.

If, for example, you were to purchase $1,000 worth of Bitcoin and later sell it for $1,200, you would need to report the $200 you gained from the sale on your taxes. The amount of money you make from investing in cryptocurrency will depend on how long you hold the investment.

If you sold $1,000 worth of Bitcoin for $800, you would offset other gains and up to $3,000 of your taxable income if your total losses are greater than your total gains. Any loss that is not used can be carried over to future years to offset future gains or up to $3,000 of your taxable income per year.

If you mine cryptocurrency

Cryptocurrency mining is the process of solving complex mathematical equations to verify and add transaction data to a digital ledger. Mining is the process of verifying cryptocurrency transactions and adding them to the blockchain public ledger. In exchange for this work, miners receive cryptocurrency as a reward.

If you earn cryptocurrency by mining it, the cryptocurrency is considered taxable income. The value of the cryptocurrency is reported on Form 1099-NEC at the fair market value of the cryptocurrency on the day you received it. You should report any income you receive to the IRS, even if you don’t get a 1099 form for it. The IRS views this as taxable income and it may be subject to self-employment tax as well as income tax.

If you receive cryptocurrency as payment for goods or services

Many businesses now accept Bitcoin and other cryptocurrency as payment. This is because cryptocurrency is becoming more popular and is seen as a more secure form of payment. The payment is considered taxable income if someone pays you in cryptocurrency in exchange for goods or services. This is the case even if they pay you via cash, check, credit card, or digital wallet. The dollar value you receive for goods or services in cryptocurrency is equal to the fair market value of the cryptocurrency at the time of receipt.

If you sell or spend cryptocurrency

If you get cryptocurrency through mining, purchasing, or receiving it as a gift, and then sell or spend it, you’ve made a capital transaction that results in a gain or loss, just as if you sold shares of stock. This is where cryptocurrency taxes can get more involved. You need to report any capital transactions involving cryptocurrency on your tax return.

For example, if you buy cryptocurrency that appreciates in value and then use it to purchase plane tickets, you will save money. The example will involve paying taxes on income and capital gains.

• First, you receive $200 worth of the cryptocurrency Litecoin in exchange for services on January 15.
• Six months later, on July 15, the fair market value of your Litecoin has increased to $500, and you use it to buy plane tickets for a vacation.
• On your tax return for that year, you should report $200 of ordinary income (either as wages if reported on a W-2 or as self-employment income if you are not an employee getting paid in crypto) for receiving the Litecoin in January and a short-term capital gain of $300. That’s the $500 value of your Litecoin when you purchased the plane tickets, minus your $200 basis when you received the Litecoin.

Your basis in Litecoin for capital gains tax purposes is $200 higher than it would otherwise be because you included $200 of ordinary income in your taxes. The $200 worth of Litecoin that you originally bought can be used to purchase plane tickets, meaning you would not have to pay capital gains tax on that amount.

If you paid capital gains tax on the full $500, you would also be paying tax on the initial $200 since it would be taxed as a capital gain.

Therefore, the balance of $500 is minus the original $200 basis.

Those two cryptocurrency transactions are easy enough to track. If you were to purchase $1,000 worth of Litecoin and load it onto a cryptocurrency debit card, you would be able to spend it over a period of time on items such as coffee, groceries, and lunches.

If you are a taxpayer and you think of cryptocurrency as a cash alternative, it can be tough to figure out at the end of the year how much money you have made or lost on each transaction. You need to keep track of these transactions for tax reporting.

If you exchange one type of cryptocurrency for another

This activity is called “cryptocurrency trading.” Cryptocurrency enthusiasts typically exchange one type of cryptocurrency for another. This is called “cryptocurrency trading.” If you have $1,000 worth of Litecoin and you exchange it for $1,000 worth of Ethereum, you will have the same amount of each cryptocurrency. If you paid $300 for Litecoin, you must recognize a $700 capital gain when exchanging it. At the time of purchase, you established a $300 basis for your original Litecoin position. However, when you exchanged the Litecoin for Ethereum, you recognized a capital gain of $700, due to the appreciation of the Litecoin. Your new cost basis will be $1,000 after exchanging your Ethereum for it and paying the $700 capital gain.

Since your tax return is in United States dollars, all of these transactions will be referenced back to that currency. Even if you buy one cryptocurrency using another one, without first converting to US dollars, you still have a taxable transaction.

If you participate in an airdrop or fork

In an airdrop, a new crypto project gives out free tokens to early adopters and their communities to encourage adoption. Airdrops are part of a broader marketing effort to promote the project’s inception. If you often use crypto platforms and exchanges, you may get new tokens in your account as a gift. These new coins are taxable, meaning you have to pay taxes on them.

A hard fork is a wholesale change in a blockchain network’s protocol that invalidates previously-verified transaction history blocks or vice versa. A hard fork is when a cryptocurrency splits into two different currencies. This happens when the original currency wants to create a new rule for the blockchain. The new blockchain has an upgrade that the old one doesn’t have. When the old blockchain and the new blockchain split following a hard fork, many users of the old blockchain find that their version is now outdated or irrelevant. They are forced to upgrade to the latest version of the blockchain protocol. In order for a hard fork to be executed successfully, all nodes or blockchain users must download and install the latest version of the protocol software.

When a hard fork occurs, it doesn’t always mean that new cryptocurrency is issued to the taxpayer. Sometimes a hard fork can happen without any new cryptocurrency being issued, and in these cases no taxes are owed as a result. However, if a hard fork occurs and you receive new virtual currency as a result, this generates ordinary income.

You must report any income you receive on your tax return, even if you don’t receive a 1099 form reporting the transaction.