Tax Implications Of Selling Cryptocurrency
Any time you sell or convert cryptocurrency, its a taxable event. Profits increase your tax bill, while losses can offset those tax gains to lower your taxes due. In general, cryptocurrency activity breaks down into two taxable situations:
- Realized capital gains: Capital gains are an increase in the value of the currency you hold. These gains are “realized” when you sell. For example, if you buy a coin for the equivalent of $1 and sell it for $2, you have $1 in realized capital gains. This also applies to NFTs.
- Earned income: Currency you earn from staking, mining, and other activities is considered taxable income, similar to income from a side hustle.
The amount you owe depends on several factors, including how long you held the asset, how much you earned in total throughout the year, and your capital gains tax bracket.
Most tax software can import cryptocurrency-related tax information or forms to calculate your total taxes due. When in doubt, consider working with a trusted accountant or tax professional.
Learn To File Crypto Taxes Today
Recent guidance from the IRS makes the tax treatment of cryptocurrencies substantially similar to the tax treatment of stocks in a standard investment account. Cryptocurrency tax reporting requirements may seem arduous, but traders are encouraged to report their gains or losses accurately. Cryptocurrency trades may not be as private as some might think.
Bitcoins blockchain, for example, contains a record of every bitcoin transaction in its history. The only thing keeping your transactions private is that the Bitcoin wallet owner isnt public. Fortunately, now there are some tools to help cryptocurrency traders find historical pricing. As cryptocurrencies continue to grow in popularity, traders can expect more tools and better reporting available through marketplaces.
How To Calculate Crypto Income Tax
Unlike crypto capital gains where only half your profits are subject to Capital Gains Tax, the same isn’t true for crypto income. When it comes to Income Tax, you’ll take the fair market value of the crypto in CAD on the day you received it and apply your Federal and Provincial Income Tax rates to the entire amount to calculate how much Income Tax you’ll pay.
You can find your Federal and Provincial Income Tax rates in the tables above. Let’s look at an example.
Example
You live in Vancouver, British Columbia.
You earn $60,000 in taxable income from your job – youve already deducted your personal allowance. You also earn $10,000 in crypto income.
This puts you in the 20.5% Federal Tax Rate band for your crypto earnings.
Your Provincial Tax Rate band is 7.7%.
20.5% + 7.7% = 28.2%. This is your crypto tax rate.
28.2% of $10,000 is $2820. This is what youll pay in Income Tax on your crypto.
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How To File Crypto Taxes
- Calculate taxes on Cryptocurrency
- Fill out Form 8949
- Include Total in Schedule D
If youre reading this article, you probably already know what digital coins are, since youre wondering if you need to file taxes for cryptocurrency. But, just in case you dont know what cryptocurrency is, well give a brief overview of the crypto market and why crypto earnings are taxable .
Account For Bitcoin Tax Reductions
If youve donated your cryptocoins, like bitcoin or ethereum, to eligible charities, then you may qualify for reduced tax liability.
For instance, in 2017 the Fidelity Charitable fund received bitcoin donations worth around $69 million. The working mechanism of the charitable fund ensures that the received bitcoins are immediately sold on the Coinbase exchange. The dollar amount received from such a sale is invested as per the choice of the donor, who benefits by receiving a tax deduction in the year of the donation.
However, care should be taken that only cryptocoin donations made to eligible charities qualify for such deductions. Selling the tokens and then donating the dollar amount will not reduce your bitcoin tax burden. Additionally, the deductions are available for individuals who itemize their tax returns.
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How Does Capital Gains Work On Crypto
Capital gains tax on short-term capital gains: If your cryptocurrency coins have a holding period of less than 365 days, they will be taxed as ordinary income, and they will be subject to short-term capital gains tax. You are liable for taxes between 0-20% of your ordinary income tax rate if you have these amounts.
If Classified Under Capital Gains :
If the crypto-transactions are classified as investments, they will be considered capital gains or losses under the head capital gain.
If the sale value of the transaction is more than the cost, it will be regarded as capital gain, and if the price is higher than the sale value, it will be considered capital losses.
As per the applicable income tax slabs, short-term capital gains tax will be leviable if crypto assets are held for less than three years . If the crypto-assets are sold after holding the investment for three years , they will be treated as long-term investments and taxed at 20% with indexation benefit.
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Earning Cryptocurrencies Through Mining
Cryptocurrencies are commonly acquired in two ways:
- bought through a cryptocurrency exchange
- earned through mining
Mining involves using specialized computers to solve complicated mathematical problems which confirm cryptocurrency transactions. Miners will include cryptocurrency transactions into blocks, and try to guess a number that will create a valid block. A valid block is accepted by the corresponding cryptocurrencys network and becomes part of a public ledger, known as a blockchain. When a miner successfully creates a valid block, they will receive two payments in a single payment amount. One payment represents the creation of new cryptocurrency on the network and the other payment represents the fees from transactions included in the newly validated block. Those who perform the mining processes are paid in the cryptocurrency that they are validating.
The income tax treatment for cryptocurrency miners is different depending on whether their mining activities are a personal activity or a business activity. This is decided case by case. A hobby is generally undertaken for pleasure, entertainment or enjoyment, rather than for business reasons. But if a hobby is pursued in a sufficiently commercial and businesslike way, it can be considered a business activity and will be taxed as such.
How To Calculate Your Cryptocurrency Taxes Canada
Calculating your crypto taxes so you can accurately report them to the CRA can take hours – if not days if you trade at volume! You can do it all manually, or you can use a crypto tax app like Koinly to save you hours.
To calculate your crypto taxes manually, follow these steps:
If you have a higher net capital loss than your net capital gain, remember you can carry capital losses forward to future tax years to offset against future gains.
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How To Calculate Crypto Capital Gains
First of all, you need to count the total price of your crypto purchases separately for every cryptocurrency that youve traded, including the exchange commissions and transaction fees. Then divide this number by the number of coins that you own
Heres an example. You bought $100 worth of Bitcoin, got 0,013 BTC and also paid a 3% commission fee to the exchange. The formula would look like this: /0.013=~7,923 for one Bitcoin. Then simply deduct this number from the sale price of your Bitcoin and you will get your capital gain that you need to use to count your taxes.
How To Fill Out Form 8949
Below, we go through filling out IRS Form 8949 step-by-step:
First, you need to fill in the initial information at the top of the Form 8949. For the short term trades section, you will need to select check box A, B, or C in Part I:
- Short-term transactions reported on Form 1099-B showing basis was reported to the IRS
- Short-term transactions reported on Form 1099-B showing basis wasnt reported to the IRS
- Short-term transactions not reported to you on Form 1099-B
You will most likely select check box C, as crypto exchanges typically do not provide Form 1099-Bs. However, if an exchange has provided you a 1099-B, you will want to check A or B.
You will then need to organize your calculations row-by row, including the details of each transaction:
The below example shows a completed Form 8949 of short term sales of ETH, ZEN and ELF.
Next, you need to include your Totals in the aggregate boxes at the bottom of the form.
- Total Proceeds: the sum of your transaction sales prices.
- Total Cost or other basis: the sum of your transaction acquisition prices.
- Total Adjustment, if any, to gain or loss: Typically, you will not have any adjustments. If you do have adjustments, the total would be reported here without any accompanying description.
- Total Gain or : the sum of your transaction capital gains or losses.
Afterwards, you will repeat the same steps to populate the information for your long-term trades in Part II of Form 8949.
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Irs Increasing Enforcement Of Cryptocurrency Tax Reporting
The IRS estimates that only a fraction of people buying, selling, and trading cryptocurrencies were properly reporting those transactions on their tax returns, but the agency provided further guidance on how cryptocurrency should be reported and taxed in October 2019 for the first time since 2014.
Beginning in tax year 2020, the IRS also made a change to From 1040 and began including the question: “At any time during 2020, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
If you check “yes,” the IRS will likely expect to see income from cryptocurrency transactions on your tax return.
How To Calculate Crypto Gains Canada
You’ll have a crypto capital gain or loss any time you sell, swap, spend or gift your crypto – so you need to know how to calculate crypto gains.
A capital gain or loss is the difference in value from when you bought or otherwise acquired your crypto to when you disposed of it by selling it, swapping it, spending it or gifting it. If you’ve made a profit from the difference in value – you’ll have a capital gain. If you’ve made a loss from the difference in value – you’ll have a capital loss.
Calculating your crypto gains is pretty straightforward. First, you need to figure out your cost basis.Your cost basis is how much it cost you to buy your crypto asset, plus any transaction fees. Canada use the adjusted cost basis method. This allows you to amend your cost basis to reflect how much a given capital asset actually cost you. So you can add in fees for selling your crypto, purchasing your crypto and so on. However, if you acquired crypto for free, like through an airdrop, the adjusted cost basis method will also reflect that it cost you nothing to acquire your crypto – so your entire proceeds would be profit and subject to Capital Gains Tax.
Example
You live in Vancouver, B.C.
You earn $60,000 in taxable income after you deduct your personal allowance. You made a capital gain of $15,000.
You only need to pay tax on half your capital gains, leaving $7,500.
Your Federal Tax Rate is 20.5%. Your B.C. Provincial Tax Rate is 7.7%.
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How Is Cryptocurrency Taxed
In the U.S., cryptocurrency is taxed as a capital asset, like property. Every taxable event as defined by the IRS must be reported on an IRS 8949 cryptocurrency tax form. With TaxBit, you dont have to worry about figuring out which of your crypto trades are considered taxable events. TaxBits software is integrated with Okcoin and automatically determines what trading activity among customers is subject to taxation.
How Do I Calculate My Crypto Losses For Taxes
To calculate your total losses:
- First, find the net total of your long-term gains and losses, including those on any non-crypto assets
- Then, find the net total of your short-term gains and losses, including those on any non-crypto assets
- Finally, find your overall capital gains or losses by calculating the net total of the long-term gain/loss and short-term gain/loss
If you have a net loss among all capital assets, then you can deduct up to $3,000 of those losses and carry forward additional losses to offset future capital gains.
Calculating these losses and deductions can be difficult if you have a large or complicated portfolio. However, crypto tax software can make this process significantly easier.
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Do I Need To Report Cryptocurrency On My Taxes
For the majority of people who have interacted with cryptocurrency, the answer is yes, you do need to report crypto on your taxes. However, there are a few situations that dont result in a taxable event, which we will clarify below.
With that said, its important to understand what type of activity exactly constitutes a taxable event when filling out your tax forms. For the first time ever, the IRS has placed a question at the top of Form 1040 that asks , t any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?
Essentially, by placing this question front and center on Form 1040, the IRS is indicating that you can no longer claim you simply didnt know you were supposed to report it.
By checking yes to the question above, the IRS will look to see if you also filed an IRS 8949 form, the same form used when reporting gains and losses on stocks or equities. And if you fail to file this form, you can almost certainly expect to be audited.
But, as mentioned above, not all cryptocurrency activity is taxable. Lets break down what events you do need to include in your tax reporting, and what sort of events arent taxable.
When To Use Irs Form 8949
Check out this video below to figure out when to use IRS Form 8949.
If you use tax software or an online tax service, like TurboTax, the software or web app will walk you through the process and will ask you if youve had any investment income. Answer the questions accurately and the software or web app will automatically place your losses or gains on Schedule D of your electronic return.
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Is Cryptocurrency Taxable In Canada
Yes. You’ll pay tax on your cryptocurrency in Canada.
Cryptocurrency isn’t seen like a fiat currency in Canada. Instead, it’s viewed as a commodity, which is a capital asset – like a stock or a rental property.
Why do you need to know if it’s classed as a capital asset from a tax perspective?
Because this explains how cryptocurrency is taxed in Canada.
How Is Crypto Income Taxed
Crypto income is taxed as ordinary income at its fair market value on the date the taxpayer receives it.
Here are the most common examples of what’s considered crypto income:
- Receiving crypto as payment for providing a service
- Staking crypto and earning rewards
- Lending crypto and receiving interest payments
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
Crypto Margin Trading Derivatives And Other Cfds
The tax treatment of crypto margin trading, derivatives products like Bitcoin futures and other CFDs all depends on whether you’re seen to be acting as a day trader or an individual investor. So it will all depend on the scale at which you’re trading – but let’s look at both scenarios and the taxation.
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I Hold Crypto At A Loss But Haven’t Sold It Can I Claim A Loss On It
In order to claim a loss, you will need to have made a taxable event on the assetthis means selling it, trading it for another crypto, or spending it. Otherwise, the loss remains unrealized and thus cannot be reported as a capital loss.
With tax loss harvesting, you can pinpoint unsold assets that are at a loss before the end of the tax year. For example, if you invested in many ICOs, you may be holding some coins that you can sell off to claim the loss and lower your tax liability.
A Gift Of Crypto Is Treated The Same As Other Gifts
If youve given cryptocurrency to someone, perhaps a younger relative as a way to spark interest, your gift will be treated the same way as any similar gift would be. So it can be subject to the gift tax if its over $15,000 in 2021 . And if it comes time for the recipient to sell the gift, the cost basis remains the same as the givers cost basis.
That said, there are some ways to escape the gift tax, even if you go over the annual threshold, such as taking advantage of the lifetime exemption.
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