Crypto taxes might be kind of tricky especially if you don’t like the fact that you have to pay them. Now, a lot of people would immediately frown, “Have to? Wait a minute, doesn’t it depend on your geography?”
Yes, it does. But there are countries where cryptocurrency tax evasion has serious implications already.
For instance, in the U.S., the IRS (The Internal Revenue Service) want you to pay taxes on crypto, and if you don’t, you become subject to a $10K fine, to begin with.
What to report
First and foremost, let’s deal with the basics. In order to report taxes, you should clearly understand what you report.
The problem with crypto is that in different parts of the world crypto has different status.
For example, in the U.S., cryptocoins are considered property. But keep in mind that although a home, a stock and cryptocurrencies are capital assets and significant pieces of property, the IRS views them all differently.
The UK doesn’t consider cryptoassets to be currency or money. Crypto holders are liable to pay capital gains tax.
In Israel, the situation is somewhat the same. The Tax Authority will regard crypto as subject to the country’s 25% capital gains tax.
If you live in a country where there is no legislation that definitely allows or forbids any activity that has to do with crypto, for example, in Russia, the benefit of the doubt shall be given to you.
That being said, you can apply one of the above cases to your situation and take it from there. The point is to understand how your country treats crypto. Do they tax crypto as if they’d tax property, capital gains or do they not tax it at all?
Your further actions depend on the answer to the previous question.
As the U.S. is one of the most developed jurisdictions on the planet in terms of the crypto tax legislation, and other countries will likely follow the standard in the future, we will cover their policy on the subject in the further sections of this piece.
Determine how much you should tax
Now, how much crypto do you have to tax if you’re not a company but an individual that has crypto on accounts? What if you’ve been trading since 2013? What if you’ve been trading for 5 months only?
Unfortunately, you will have to tax your gains in both cases, but depending on whether we’re talking about short-term (<12 months) or long-term (>12 months) revenues, the tax rate will be lower or higher.
What is considered a short-term capital gain in the U.S.? It is a capital gain from an asset that was being held for less than a year.
Say, you bought Ripple (XRP) 9 months ago and sold it at a gain two weeks ago. The moment you sold your crypto assets is called a taxable event, and the timing of this taxable event – sooner than 12 months after purchasing the asset – determined the short-term status of your capital gain tax.
If you’re single and you’ve made $9K over the past 8 months while holding Ripple (XRP), you owe 10% tax to the government.
There is a specific table with tax rates for short-term capital gains that will help you define your debt.
As for long-term capital gains tax rates, it is a capital gain from an asset that was being held for longer than a year.
Say, you bought 4 Bitcoins (BTC) in July 2015 for $250 each and since then, you were holding it on top of your exchange. Over the past 5 years, the value of the asset has significantly increased.
In November 2019, you met your future wife, decided to invest all of your capital into mortgage and sold all of your Bitcoins (BTC) for $9K each, making $36K in total and a profit of $35K minus commissions.
Once you transferred your crypto from an exchange to your bank account, you triggered a taxable event.
But because you’re still not married and made less than $39K over the past 5 years, you owe nothing to the government.
Take a look at the table of long-term capital gains tax rates to assess your own situation. Taxes for long-term gains are generally lower than the ones for short-term capital gains.
Software to help you pay taxes on crypto
Say, you’ve been trading since Mt Gox times. Will it be possible for you to tax the income from that exchange?
Yes, of course, but you will have to do it manually.
But, fortunately, in most cases, you can use crypto software which automates the processes and saves time. Depending on the country of your residence, you might want to use different solutions. BitcoinTaxes, CryptoTrader.Tax or CoinTracking are products that are good to go if you need to generate a report for the U.S. IRS.
With this crypto tax helpers, the process looks like this. You choose a service, select a correct tax year, import all of the trades from their exchange, download the CSV files to the dashboard of the software and generate the report.
Don’t forget that not only should you report gains made throughout your trading activity but also gains on airdrops, mining/staking, fork events and gifts received in cryptocurrency. With the crypto tax calculator Bitcoin.Taxes, for example, you can do so by clicking on the Income tab. With some calculators, you can add not only exchanges but crypto wallets.
What will the final version of your report to the U.S. IRS look like? It will be a regular IRS Form 8949 filled with your crypto transactions history.
Once you’re ready with this part, you will have to manually transfer your data to Schedule D.
Yes, that all sounds like a lot of time spent. That’s why it is recommended to automate at least a part of the process.
The foreign-institutions trap
Unfortunately, the IRS is not the only institution that might be interested in your crypto gains. If you have larger amounts on top of big trading venues, The Financial Crimes Enforcement Network (FinCEN) becomes curious, too.
In the United States, such exchanges as UPbit, for example, are considered foreign, meaning that you might be subject to the taxation for holding money “abroad”. In this case you have to report your gains to the FinCEN by using such forms as 114 FBAR and/or FATCA form 8938. But it’s only applicable when your financial assets held in foreign institutions top $10,000.
Which form do you have to use to report crypto taxes on your particular situation? Which institution do you you have to report to?
In order to do everything right, it’s recommended to consult a tax professional.
They know how much crypto you have
If you’re still sceptical and think that you shouldn’t pay taxes on crypto at all, here is a list of interesting facts.
In 2016, the IRS sent a quiet request to Coinbase asking them to turn over identities and full transaction history of millions of customers who traded on top of the platform from 2013 to 2015.
A fact number two is that the Internal Revenue Service has purchased specific software to track people using Bitcoin.
And last but not least, Clinton Donnelly, crypto tax lawyer, said that we all “will be astonished” about how much IRS knows about every crypto trader in the U.S.
The expert added that IRS has an agreement with NSA (The National Security Agency), which tracks all the Coinbase emails. “After the very first email Coinbase sent you, IRS immediately noticed you,” Clinton explained.
He also mentioned that there are too many users, so your first letter will be computer-generated. “And then they will hit you with more computer-generated letters. Each computer-generated letter is going to include a $10K fine against you. You’re automatically guilty and will have to prove you’re innocent.”
Now, considering that some of you reading this are libertarians who don’t want to have anything to do with the governments – we understand. But don’t forget that governments all over the world constantly work on their crypto legislations, and the times, they’re changing. Nowadays is not the same as the year of 2013, and it’s much safer to pay taxes on crypto than not.
This article is not financial advice. To learn about your situation in detail, consult a crypto lawyer.