The cryptocurrency market is worth more than 2 trillion US dollars and a considerable portion of this huge market cap is a result of cryptocurrency trading. Millions of crypto enthusiasts and traders are buying, selling and exchanging cryptocurrencies on numerous crypto exchange platforms. Similar to the stock market, the crypto market also offers a lot of opportunities to profit from the price fluctuation of coins and tokens.
Profiting from crypto trading has been largely unregulated by financial institutions, but the situation is changing during the last couple of years. Today, if you’re profiting from the cryptocurrency market, you need to take into account crypto taxes and settle your tax obligations on time.
Let’s take a look at how crypto and taxes work, what are taxable cryptocurrency events and how to file your taxes.
The decisive factor when calculating your crypto taxes is called capital gains. Capital gains from cryptocurrencies are all profits from various crypto related operations such as exchanges and sales. Whenever you manage to profit from crypto, you are generating capital gains that will be taxed.
For example, if you buy a certain amount of Bitcoin (BTC), the price of the coin starts rising and you decide to sell it and cash out, the profits you made thanks to the new price are considered capital gains. Since cryptocurrencies are a very volatile asset class, experienced traders who act fast can generate a lot of capital gains, which in turn incurs considerable taxes.
Taxable Crypto Events
In order to accurately calculate your cryptocurrency taxes, you need to know which crypto related operations are considered taxable events by financial institutions.
All crypto trading and asset exchanging on crypto exchange platforms is considered a taxable event, because users can clearly profit from the difference in asset prices. If you buy a certain amount of let’s say Ethereum (ETH), then exchange it for Ripple (XRP) and the price of XRP dramatically increases over the current tax year, you have clearly profited from this exchange. That’s why it’s important not to forget about profits from exchanging cryptocurrencies.
When you sell your cryptocurrency in order to cash out into fiat money like EUR or USD, you’re generating a taxable event, but if you simply buy a cryptocurrency and hold it, you won’t be taxed until you sell it. In case you sell your cryptocurrency for a price lower than the initial purchase price, you can file capital losses and have the amount of losses deducted from your capital gains taxes.
If you use cryptocurrency for purchasing products online, your purchases will be subject to taxation, as well as cryptocurrency mining, which can be considered a taxable business if it’s a large-scale operation. If you’re mining modest sums of cryptos, you’ll only be taxed once you sell or exchange the mined coins.
In case someone pays you for products or services with cryptocurrency, that’s also considered a taxable event.
How to Calculate Crypto taxes?
Calculating your crypto taxes can get quite complicated, especially if it’s your first time. It’s best to take the following steps into consideration when calculating your taxes.
Cryptocurrency Cost Basis
The first thing you need to take into account when calculating your crypto taxes is the cost basis of all of your taxable events. The cost basis is the price of your cryptocurrencies involved in taxable events when you bought them, enlarged with additional expenses such as transaction fees and crypto exchange platform trading fees. This is the foundation for calculating your taxes.
Local Tax Rate
You need to find out the exact tax rate for cryptocurrencies in your country. This tax rate can vary depending on region, local tax regulations and the amount of cryptocurrencies in question. For example in some countries you’ll incur a different tax rate if you’re considered an active cryptocurrency trader or if you’re just an occasional crypto investor with modest trading volumes. It’s best to contact your local tax authorities to find out the exact tax rate that applies to your activities.
Cryptocurrency Tax Data and Tax Software
Crypto tax data, or so called tax lots are an essential component for calculating taxes. Tax lots include detailed information about your transaction history, the amount of cryptocurrencies you’ve purchased, sold, exchanged or kept in your crypto wallet. The duration of time you’ve been holding certain cryptocurrencies is also something that should be included in your tax lots.
A great way to save yourself some valuable time calculating your tax lots is by using a crypto tax calculator. You can find various free crypto tax calculator apps online, which can automatically generate your tax lots when you connect your crypto wallets and exchange platform accounts to the software. The software just pulls all the transaction data from your connected accounts.
Consult a Tax Professional
Finally, it’s highly recommended to consult a cryptocurrency tax professional before submitting your tax reports for the first time. Tax professionals will charge you a service fee, but it’s definitely worth it because they’ll check your documentation thoroughly and make sure everything is in order.
The time when cryptocurrencies weren’t regulated at all is long gone and you should always take into account taxes when dealing with cryptocurrency. Follow this basic advice when filing your crypto taxes and whatever you do, don’t try to evade paying taxes, because that’s a serious offense in every part of the world.