6 Crypto Tax Things You Should Be Aware of for Trading, Mining, and Earnings
When it comes to discussing cryptocurrency investments, no one really talks about tax. I mean we all know it’s there and it’s important, but you’d rather talk about your gains than your ACBs wouldn’t you?
For those new to investing, especially in cryptocurrency, you might not even know what ACBs are. The Adjusted Cost Base is a weighted average of all your individual purchases per cryptocurrency. In the US, your ACB may be calculated using either the FIFO or LIFO method.
You also might not even be aware that that crypto assets are taxable like stock, bonds and property. To save you the reading, we’ve prepared a list of the most important tax considerations you should be mindful of as an individual buying and selling cryptocurrencies.
Note that this article does not constitute as tax advice in any way. You should always consult a professional tax advisor and/or official documentation for further information.
1) Everything is taxable
Yes that’s right. Every single cryptocurrency — no matter how you came to own it — is taxable. As a tax resident of a jurisdiction, you are taxable on your entire world wide income. This means it doesn’t matter which exchange you buy or sell the crypto (foreign or domestic), doesn’t matter what currency you used to pay, and doesn’t matter if you choose to bring funds you have abroad back to your tax domicile.
Every trade, whether fiat to crypto, crypto to fiat or crypto to crypto is taxable. Only wallet to wallet transfers are not.
This includes any coins you may have mined, any cryptocurrencies you might have been gifted and any tokens you’ve received from investing in Initial Coin Offerings (ICOs).
2) Keep records of everything
Whilst no definitive requirement exists just yet, at some point in the near future, the tax authorities may ask for proof of transactions. Quite likely this will include retrospectively for previous trades. So as annoying and time consuming as it may be, please always keep a record or have access to transaction history for the taxable period (typically from January 1 to December 31st of a specified year).
Cryptocurrency trading is still a new and rapidly developing phenomenon, but the tax authorities have been slow to the game. Once an agreed upon framework comes into play, you can bet your Bitcoin that the CRA or the IRS will ask you to submit proof when you calculate your final tax to be paid.
3) How to calculate the amount of tax due
Capital gains are based on the average cost for each coin or token and tax is calculated once annually. So the first thing you need to do is calculate your ACB of each cryptocurrency in your portfolio.
Capital gains are recognized when you sell assets. Therefore, for tax purposes, your capital gains per unit are the sales price less the ACB. Note that the ACB might not change — such as when FIFO calculations are used — in the future if you sell more at a later date, but it will change if you buy more later. In Canada, to get a very good indication of taxes owed, divide capital gains by two to arrive at taxable capital gains. Then divide this number by two again to reach taxes owed.
In the US the tax rate depends on two factors: firstly whether these are long-term holdings i.e. more than one year and secondly your tax bracket. Short term capital gains in the US are taxed at your ordinary income rate — which is almost inevitably higher than the long-term rate.
There are exemptions available under certain situations, so check with your jurisdiction’s tax authority.
4) And if I made losses
If you have made capital losses on any particular cryptocurrency, you may be able to net these against your capital gains on other cryptocurrencies in order to offset your tax liability.
Such tax offsets are deferrable — with no time or monetary limit in Canada — but it is always recommended to make use of tax deferrals at the earliest opportunity. So check if your taxable income is able to be offset by your losses.
5) Everything should be converted back into your home currency
All currencies must be measured in your home currency when you calculate ACB and capital gains. This is where keeping record of transactions becomes even more important.
If you trade one crypto currency for another, please make a note of the dollar price at the time of exchange for both currencies. This will help calculate the gains for the sold crypto and the ACB for the bought. If a price is not available, then December 31st price as of year end is to be used.
Always be careful and keep track at the time of the trade — as if you sold bitcoin on June 1st, 2017 but didn’t keep track of the price, you would be taxed on a gravely higher amount come December 31st.
6) 2 special cases
If you mine cryptocurrency, you can claim against costs used in generating this profit. Just as companies are charged corporate tax after costs, individuals who mine can claim costs used in electricity and other incurred expenses when calculating ACB. Use the price at the time of mining to calculate correct ACB.
Gifting cryptocurrencies is perhaps the most precarious of all situations to consider in taxable situations. Under certain scenarios, gifting of assets is double taxable under Canadian rules, and any year where total gifting exceeds $100,000. In the US there is a gift exemption up to $14,000 per recipient but beyond this is taxable depending on circumstance. In these situations it is best to check with a tax advisor as to your own situation.
Can I just ignore it?
No. If you made money in crypto, you need to get on this.
As of yet, there is no overtly official framework for cryptocurrency related tax, so please do your own research fully into your situation and jurisdiction. Because it is for certain that the authorities are looking to apply a tax system for cryptocurrencies as with all income and gains generating assets.
Despite the decentralized nature of cryptocurrencies, they are taxable as financial assets by law. They are treated as property just like stocks, bonds or real estate. For the decentralized economy, this is a big step forward. The fact alone that governments are taxing cryptocurrency further entrenches decentralization into the financial system and is an indication of adoption.
Why pay taxes? — because it means you’ve made money, and there is a lot of money to be made in this industry. Recently, CFTC Chairman commented on how the current rate of growth in cryptographic markets could surpass “$20 Trillion by 2020”. To be clear — that’s 19.5 Trillion USD of growth in 22 months.
They say that there are only two certainties in life — death and taxes. Tokens and coins built on public blockchains are permanently available for auditing in the future. Fines and high interest charges are frequently far more than the amount of tax originally owed and blockchain forensics software is enabling new machine learning monitoring and alert systems for fraudulent or unreported activity.
The truth is, even in the crypto world — death and taxes still apply. A lot of people are making very good money right now and with taxation comes legitimacy and adoption. For all but a few financial intermediaries, another $19.5 Trillion USD of decentralized capital adoption is an exciting opportunity.
So raise a toast to your new lambo and pay your fair share of tax — but not a Satoshi more.
Recently, we hosted a panel discussion with BC Blockchain Forum to talk What the Tax is Up With Crypto?. Check it out and share this post if you have a friend who is wondering what to do about cryptocurrency taxes.
Matthew Unger is CEO of iComplyICO, the world’s first automated compliance protocol that enables ICO issuers, security token platforms, and investors to both launch and trade coins or tokens in compliance with global securities, identity, and privacy regulations.
You can find @iComplyICO on LinkedIn, Facebook, Twitter, and Telegram
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