2018 saw a record volume of cryptocurrency trading across global markets. As tax time approaches, it would be wise to take heed of some sound concepts with regards to the tax situation for your crypto portfolio.
Here are some pointers that can assist you with assessing crypto tax liabilities and in line with this statement during the now famous Helvering v. Gregory case which sums it up quite eloquently:
In response to the boom in cryptocurrency adoption among the global population, governments around the world are beginning to legislate.
According to the Internal Revenue Service, virtual currency transactions are taxable by law in the United States. As a result, the IRS released a guidance FAQ (its first and only one to date) to answer questions regarding how tax principles apply to cryptocurrency transactions. As it stands, this one notice is considered the authority until new legislation is passed.
Different countries around the world have different laws relating to the taxation of digital currency, so it is important to check your local laws. Many of these regulations, however, are similar in principle to what is currently in place in the US examples given here.
Nexo and TokenTax prepared a comparative spreadsheet on how crypto is treated in the US, UK, Germany, Australia, Canada, Spain, South Africa, Japan, Switzerland, New Zealand, France, and Portugal.
What Qualifies as Cryptocurrency?
According to the IRS document, for federal tax purposes, virtual currency is essentially treated as property, not currency. Under this definition, cryptocurrency includes anything that is considered a “convertible virtual currency,” meaning it has an equivalent value in real currency or acts as a substitute for real currency. While not all cryptocurrencies act this way, many do.
Furthermore, “a taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency measured in U.S. dollars, as of the date that the virtual currency was received.”
Realizing a Gain
As a result of this, transactions using virtual currency must be reported in USD. If the value of the property (or currency) received has increased in value, the taxpayer has a taxable gain. What is more, cryptocurrency that is mined is also considered gross income.
“Taxable events” are those instances where you commit to a specific action. In the case of cryptocurrency trading, these taxable events include:
- Trading cryptocurrency for fiat currency;
- Trading cryptocurrency for another cryptocurrency;
- Using cryptocurrency to purchase goods or services.
In a nutshell: any exchange of crypto triggers a taxable event.
If you have realized a gain, you will need to pay taxes on it. However, if you have taken a loss, you can potentially lower your tax bill. In the present crypto market climate, this may be the more likely scenario.
Instances that are not considered taxable events include the donation of cryptocurrency as a gift, wallet to wallet transfers of cryptocurrency and simply buying crypto with fiat money.
Tip 1: Keep Accurate Crypto Trading Records
Major exchanges, such as Coinbase, will only issue a tax form statement to exchange users who have realized gains in excess of $20,000 USD and been involved in at least 200 transactions.
Multiple transactions over an entire financial year period can get very complicated in calculating the amount of tax owed. It is highly recommended to consult with crypto tax software companies such as TokenTax that can extract your trade data directly from exchanges and automatically calculate and create your tax documents.
Another good piece of advice is to record your transactions in a log (if possible) without attempting to hide your trades. Failure to report may result in a penalty of up to $250,000.
Tip 2: Offset Your Crypto Gains with Other Capital Losses
In many jurisdictions crypto tax gains are categorized under capital gains and losses. So are other investments you may have. And in case you incurred losses when trading stocks or when disposing of real estate, you can use these losses to offset the crypto gains you had during the same tax year. The MSCI world index returned -10.44% in 2018, so it’s very likely that you could have losses in your stock investments that can be used to offset your crypto capital gains.
Tip 3: Save on Taxes by Accounting for Your Losses and Interest Rate Payments With Crypto Tax Loss Harvesting
Crypto tax loss harvesting is a legal method allowing you to minimize your taxes. The strategy is to liquidate your trading positions based on the loss of the position. In many countries, you can use these losses to offset a portion of your ordinary taxable income. In order to employ this strategy, first you need to monitor your unrealized gains and losses, and then conduct trades that allow you to realize the gain/loss. The easiest way to do this is by using the TokenTax Tax Loss Harvesting Dashboard.
Tip 4: HODL — the Billionaire’s Approach
Essentially, the simplest way to minimize your capital gains is to avoid triggering additional capital gains. If you have bought cryptocurrency but have not realized any gain, you do not need to report. This is the HODL advantage of long-term holdings and the very essence of what Nexo’s instant crypto credit lines are all about — letting crypto enthusiast borrow against their assets rather than selling. This is the best of both worlds — instant access to cash and HODLing for the long run.
When an investor holds an asset for a year or less before they dispose of it, the sale triggers a short-term gain or loss. These short-term gains are taxed at the investor’s ordinary income tax rate of up to 39.6%.
However, investments held longer than a year are considered long-term and taxed at a lower rate of less than 20%. In some countries, long term gains can be taxed as low as 0%.
Different countries have different rules on crypto taxation. It’s imperative that you consult with a tax professional who can easily point you in the right direction but as a general rule of thumb, Nexo is here to help.
As the world’s most advanced lender and the only one to offer loans in 200+ jurisdictions and in over 40 fiat currencies, Nexo gives the community access to instant cash against their digital assets while retaining the upside potential benefits of their cryptocurrencies. And all this at an APR that starts at 8%.
What if You Forgot to Report Your Crypto Trades Last Year?
A lot of people were confused about crypto taxes last year, so many failed to report. In most countries, tax authorities can audit taxpayers for numerous years in the past, so it’s recommended to go back and fix this. Just go and calculate your tax liability for last year using a crypto tax tool like this one and file an amended tax return.
Get Personalized Advice from Proficient Crypto Accountants
Finding a crypto tax accountant is not easy. There are thousands of CPAs and tax filing professionals in the United States, but very few understand this novel industry enough to guide you correctly. If you also consider that the IRS has not released clear guidelines around cryptocurrency tax rules, it can be quite difficult to find an accountant you can trust. If you have a CPA that does not understand the industry, the tools, and the projects, you may be out of luck. Check if accountants have invested or used crypto themselves. Crypto is so unique that you do not want to lean on someone who cannot relate to the asset class’s nuances.
Luckily, the team at Nexo’s partners from TokenTax consists of crypto accountants that can file your crypto returns by addressing all the edge cases mentioned above. Their accountants are licensed in the United States and can also refer users to partner accountants in other jurisdictions.
*Note: Nexo and its affiliates do not provide tax, legal or accounting advice and this information is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.