Swapping Or Trading One Crypto Asset For Another
Swapping crypto assets are considered taxable events whether theyre traded directly peer-to-peer or on a cryptocurrency exchange.
Heres an example: you bought 10 litecoin for $500. After a few months, you traded all of your LTC for one ETH. When you made the trade, 10 LTC were worth $3,000.
In this transaction, you incurred a capital gain of $2,500the difference between the value of the 10 LTC at the time of your purchase: $500, and the value of the LTC at the time they were traded: $3,000.
Youll need to report $2,500 as a capital gain on your taxes.
Its important to note, if you transfer an asset from one exchange or wallet to another, it isnt a taxable event because it doesnt trigger any capital gains or losses.
The tax events the IRS has declared should be taxed as income include:
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Earning crypto interest from decentralized finance often referred to as DeFi lending
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Receiving crypto via an airdrop
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Receiving crypto payment for carrying out a task for example conducting bug bountiesscouring code for bugs in exchange for payment
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Earning crypto from staking and liquidity pools
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Earning crypto mining income from transaction fees and block rewards
How To Reduce Taxes On Cryptocurrency Gains Through Tax
No one likes to find out they owe money when tax season comes around. Thats why savvy crypto investors are well aware of the tax implications of their trades throughout the yearand they use this to their advantage through a strategy called tax-loss harvesting.
You can use tax-loss harvesting to sell your cryptocurrency assets while in a loss position to offset your capital gains, and therefore reduce taxes on cryptocurrency gains. And, even if you dont have capital gains to offset, tax-loss harvesting could still be beneficial as a capital loss deduction from your income.
Buying And Selling Crypto As A Business
If you are a trader and you hold crypto for sale or exchange in the ordinary course of your business the trading stock rules apply, and not the CGT rules. This means the crypto you buy and sell is viewed as trading stock. Trading stock rules bring to account the tax value of stock at the year end. Profit from the sale of cryptocurrency held as trading stock in a business is ordinary income. The cost of acquiring cryptocurrency held as trading stock is deductible as a business tax deduction.
Examples of businesses that involve cryptocurrency include cryptocurrency trading businesses, cryptocurrency mining businesses, cryptocurrency exchange businesses .
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If You Stake Cryptocurrencies
Staking cryptocurrencies is a means for earning rewards for holding cryptocurrencies and providing a built-in investor and user base to give the coin value. Earning cryptocurrency through staking is similar to earning interest on a savings account. In exchange for staking your virtual currencies, you can be paid money that counts as taxable income.
You treat staking income the same as you do mining income: counted as fair market value at the time you earn the income and subject to income and possibly self employment taxes.
How To Calculate Crypto Income
Calculating income from crypto is easy – albeit time consuming. You need to identify the fair market value of the coins or tokens on the day you received them in GBP.
This is easy if you’ve earned a small amount of irregular income, but far more time-consuming if you have regular amounts of small income like through mining or staking. Going back through an entire financial year to identify the fair market value of each transaction can take hours! But fortunately, Koinly does this for you.
Example
Aida earns £4,000 in additional income from a variety of crypto investments. She needs to figure out how much Income Tax she’ll pay on this.
She earns £40,000 in income in the 2021 financial year. Remember £12,570 of this is tax free.
This puts her in the basic rate tax allowance of 20%. Aida will pay 20% tax on her crypto income of £4,000, so a total of £800.
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Is Cryptocurrency Legal In The Uk
Yes. It’s legal to buy, sell, trade, spend and gift crypto in the UK – as well as many other investments. The only investment activities “banned” by the Financial Conduct Authority are crypto derivatives and ETNs. Even then, you’re not going to end up in prison for opening a position. It is crypto exchanges operating in the UK that are unable to sell derivatives to UK consumers.
Spending Crypto On Goods And Services
Spending your crypto is subject to Capital Gains Tax as it’s a disposal of an asset. The IRS views this as you selling your crypto for market value. So you’ll need to calculate your cost basis and subsequent capital gain or loss for these transactions. To do this, just take the cost base of your crypto asset and subtract it from the fair market value of your crypto asset in USD on the day you spent it.
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Using The Australian Cryptocurrency Tax Calculator
The cryptocurrency tax calculator provides users with an estimate of the capital gains tax incurred when a cryptocurrency asset is sold, traded, or otherwise disposed of.
In order to use the cryptocurrency tax calculator effectively, youll need to provide a number of specific details about the cryptocurrency asset you have disposed of.
If You Receive Cryptocurrency As Payment For Goods Or Services
Many businesses now accept Bitcoin and other cryptocurrency as payment. If someone pays you cryptocurrency in exchange for goods or services, the payment counts as taxable income, just as if they’d paid you via cash, check, credit card, or digital wallet. For tax reporting, the dollar value that you receive for goods or services is equal to the fair market value of the cryptocurrency on the day and time you received it.
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Calculate Gains And Losses With Crypto Tax Software
The easiest way to calculate your capital gains and losses is using crypto tax software. Crypto tax software is integrated with major crypto exchanges, blockchains, and wallets, and can help you with reporting and filing your crypto taxes.
At ZenLedger, you can use our crypto tax calculation software to simplify tax reporting and financial analysis in compliance with the IRS and the SEC rules and regulations.
Crypto Miners May Be Treated Differently From Others
Do you mine cryptocurrency as a business? Then you might be able to deduct your expenses, as a typical business would. Your revenue is the value of what you produce.
If you mine cryptocurrency, you realize income at the fair market value, so thats your basis in the cryptocurrency, says Harris. If this is a trade or business, your expenses may be deductible.
But that last bit is the key point: You have to be running a trade or business to qualify. You cant operate your mining rig as a hobby and enjoy the same deductions as an actual business.
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What Is The Cryptocurrency Long
On the other hand, if you sold your crypto after holding it for over one year, these gains would be taxed at the long-term capital gains tax rate, separate from your ordinary income. These are currently taxed at 0%, 15%, or 20% depending on your income and filing status. Comparing the two charts, these rates are lower than the short-term capital gains rate, so it is considered a tax advantage to hold your crypto assets for more than 12 months.
Receiving Crypto From A Hard Fork
The ATO has two rules for hard forks, also known as chain splits, and it depends on whether youre an investor or running a cryptocurrency business. If its the latter, youll need to follow trading stock tax rules, not crypto tax rules.
If youre an investor, you wont pay Income Tax on any new coins received as a result of a hard fork. The cost basis for new coins from a hard fork is zero.
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How To Minimize Crypto Taxes
Now that you know a bit more about crypto taxes, which is really just another way of saying capital gains taxes, you will want a set of strategies to minimize how much you pay to the IRS. Here are some useful tips to reduce your tax bill.
1. Hold Until Your Short-Term Gains Turn Into Long-Term Gains
As just noted, different capital gains rates will apply depending on how long you own cryptocurrency. If you want to lower your tax bill, hold your cryptocurrency long enough to turn your short-term gains into long-term gains. It may not be an easy task, but if you have the patience and fortitude to keep your crypto for at least a year before selling, then you’ll likely pay a reduced tax rate on any capital gain.
Heres an example: Mary, a single taxpayer, earns $70,000 in wages for 2022. She also has $5,000 in capital gains from the sale of cryptocurrency. If the gain is short-term gain, she’ll have $75,000 of ordinary income. After claiming the standard deduction, that leaves her with $62,050 of taxable income, which puts her in the 22% tax bracket and results in a tax bill of $9,268. However, if the gain is long-term gain, the $70,000 of ordinary income, minus the standard deduction, is still taxed in the 22% bracket, but the $5,000 of capital gain income is only taxed at 15%. That means an overall tax of $8,918 and a savings of $350.
2. Offset Capital Gains with Capital Losses
3. Sell In a Low-Income Year
4. Reduce Your Taxable Income
Look Out For Hmrc Nudge Letters
In October 2021, HMRC announced that it plans to probe digital currency holders over undeclared gains. The letters are sent to encourage crypto investors to pay the correct amount of Income Tax and Capital Gains Tax on their crypto asset holdings.
The best way to avoid an unwelcome visit from HMRC is to report and pay your crypto taxes accurately.
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Cryptocurrency Trading As A Business
If you are carrying on a business that involves cryptocurrency transactions, then the rules are more complex.
You may be liable to pay a number of different taxes like CGT, Income Tax, Corporation Tax, Stamp Duties and even VAT depending on the type of transaction.
Note that HMRC may decide to treat you as a business even if you are an individual if your level of activity is comparable to a business. So how does HMRC decide whether you’re holding crypto as an investment or whether you qualify as a crypto trader? Here’s what HMRC has to say about it:
“Only in exceptional circumstances would HMRC expect individuals to buy and sell crypto assets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself. If it is considered to be trading then Income Tax will take priority over Capital Gains Tax and will apply to profits as it would be considered as a business“
In this case, a trade in crypto assets would be similar to trading in shares, securities, etc. This means that crypto traders can refer to the Business Income manual for more information on the relevant approach.
When Do You Need To Report Your Crypto Taxes
The US financial year runs from the 1st of January to the 31st of December each year, so the current financial year is 2022. You need to report your crypto taxes for the financial year by the 15th of April the following year as part of your annual tax return, so the next tax deadline is the As this falls on a weekend – the official tax deadline for 2022 is Monday April 17, 2023. For US expats, this deadline is
If you filed for an extension to file your taxes using Free File or Form 4868, you’ll automatically have an extension until the 15th of October.
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Crypto Tax Uk: Ultimate Guide 2022
Do you have to pay tax on cryptocurrency in the UK? Wondering how UK crypto tax works and how HMRC views Bitcoin and other cryptocurrencies? We’ve covered everything you need to know about crypto tax in the UK in our ultimate UK crypto tax guide for 2022. We’ll explain crypto capital gains tax, crypto income tax, which UK crypto exchanges report to HMRC, how to avoid paying tax on cryptocurrency, and how to use a crypto tax calculator to work out your taxes – all in time for the 31st of January deadline!
Selling A Crypto Gift
You’ll pay Capital Gains Tax if you dispose of your gifted crypto by selling it, trading it or spending it.
The cost base of gifted crypto is inherited. This means the recipient takes on the cost base of the original asset from the sender. If the cost base of the sender is unknown, you can use the fair market value of the crypto on the day you received it as the cost base.
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How Is Bitcoin Taxed
Generally, there are no income tax or GST implications if you are not in business or carrying on an enterprise and you simply pay for goods or services in bitcoin .
Bitcoin is a regarded as a capital gains tax asset, so CGT potentially applies whenever an Australian resident sends a bitcoin to another person. However, transactions are exempt from capital gains tax if:
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Bitcoins are used to pay for goods or services for personal use e.g. Expedia hotel bookings, or at a café which accepts bitcoins, and
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The cost of the bitcoins used to pay for the transaction is less than $10,000 .
If the cost of the bitcoins used in the transaction exceeds $10,000, the personal use exemption will not be available and CGT will apply. The capital gain is calculated as the increase in value of the bitcoins between the time they were acquired and the time at which they were disposed.
How Would An Increase In Capital Gains Tax Affect Crypto Traders
President Bidens proposal to raise the long-term capital gains tax from 20% to 39.6% would only apply to those making over 1 million dollars in income. According to White House advisor Brian Deese, this would affect about 0.3% of households.
So, most crypto traders and investors wouldnt see any change to their long-term tax rates. However, for those who are affected by the nearly doubling tax rate, the incentive to hold on to taxes long-term disappears.
Additionally, historical examples of capital gains tax hikes in the Tax Reform of 1986 and the American Taxpayer Relief Act of 2012 led to an increase in stock selling. This pattern would suggest that we could expect to see large sell-offs by crypto whales who are sitting on significant amounts of unrealized gains, hoping to lock-in the lower tax rate on their cryptocurrency gains.
While there is still much uncertainty around the proposal, we do know there are strategies that can be used to offset capital gains, and therefore reduce taxes on cryptocurrency gains in the event the rates do increase.
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How To Calculate Crypto Gains
Cryptocurrency
Cryptocurrencies have been on a wild ride over the past year or so, with prices skyrocketing and dropping seemingly at random. If you’re like most people, you’ve probably made some money on cryptocurrencies but how much? And more importantly, how do you report those gains come tax time?
Cryptocurrency transactions are reported on Form 8949 and Schedule D, which reports capital gains and losses. To figure out your profit or loss, you need to know three things:
- The amount of money you spent buying the cryptocurrency.
- The value of the cryptocurrency when you sold it.
- How much commission you paid on the sale.
In this article, we’ll walk you through how to calculate your crypto gains and your tax bill and provide some tips on how to minimize your tax liability.
Does Coinbase Report To The Irs
Coinbase was the subject of a John Doe Summons in 2016 that required it to provide transaction information to the IRS for its customers. As a result, the company handed over information for over 8 million transactions conducted by its customers.
Today, the company only issues Forms 1099-MISC if it pays out rewards or bonuses to you for taking specific actions on the platform. Further, you may need to exceed the $600 minimum payment threshold for the company to issue both you and the IRS a Form 1099-MISC documenting their payments to you.
However, starting in tax year 2023, the American Infrastructure Bill of 2021 requires crypto exchanges to send 1099-B forms reporting all transaction activity.
Even though Coinbase doesnt supply this information through direct reporting to the IRS, you still must report this activity on your tax return as it is taxable income. You can access account information through the platform to calculate any applicable capital gains or losses and the resulting taxes you must pay on your tax return.
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How Much Tax Do I Owe On Crypto
How much tax you owe on your crypto depends on how much you spend or exchange, your income level and tax bracket, and how long you have held the crypto you used. For example, you’ll owe taxes at your usual income tax rate if you’ve owned it less than one year and capital gains taxes on it if you’ve held it longer than one year.