Disclaimer: The Industry Talk section features insights by crypto industry players and is not a part of the editorial content of Gist Vile.com.
Over the last eight months, as cryptocurrencies reached for new all-time highs, many people who have been holding digital assets for the long term will have taken the opportunity to cash out and reap some gains on their investments. This is why it’s unsurprising that revenue authorities across the globe are gearing up to seek out all those tax dollars that will become due when their respective tax seasons roll around.
Recently, authorities in several jurisdictions have either started clamping down or issued warnings to cryptocurrency users who may be considering an attempt to avoid their tax obligations. The Biden administration has announced plans to harvest $700 billion worth of tax dollars from cryptocurrency traders in the next decade, while the South Korean government recently started seizing crypto assets. Elsewhere, South Africa became one of the latest countries to impose a tax regime on cryptocurrencies.
While it may be tempting to try and fly under the radar, the penalties for getting caught can be severe. And as daunting as it may seem, compliance isn’t really that difficult. Once you’ve accepted that cryptocurrency taxes are a necessary evil, here’s a list to help you navigate your obligations.
1. Understand your crypto tax status
Your precise obligations for reporting and paying taxes on cryptocurrency will depend on several factors. On a high level, these are the questions you’ll need to answer.
a. Does my country have a tax regime that applies to cryptocurrencies? By now, most countries require some kind of reporting, even if tax isn’t necessarily applied. Countries known to have more “crypto-friendly” tax regimes are often known as tax havens in general, so think Switzerland, Singapore, Hong Kong – although Germany, Portugal, and the Netherlands also have more beneficial crypto tax regimes.
b. What kind of cryptocurrency transactions have I undertaken in the last tax year? In general, cryptocurrency gains will either be treated as income or capital gains. Both may be reportable and taxable. But beware, income doesn’t necessarily just mean payment for work done—more on that to come.
2. Work out what you need to report and what may be taxable.
You’ll need a complete list of all cryptocurrency transactions you’ve undertaken over the last year. What counts as a cryptocurrency transaction is also subject to interpretation. For instance, the United States Internal Revenue Service classes a crypto-to-crypto transaction as a taxable event, meaning that crypto traders can have their work cut out. However, some countries such as France only apply taxes when crypto is converted back to fiat currency.
But even if the event itself isn’t taxable, there may also be a requirement to declare transactions or holdings.
Your local tax office will be able to provide guidance on the rules, along with copies of any forms you need to make a declaration.
3. Don’t get caught out by mistaken assumptions.
When we talk of cryptocurrency being subject to a capital gains tax, it generally refers to the digital asset value having increased since it was acquired. In this case, where capital gains tax applies, the tax value is calculated based on the difference between the sale price and the purchase price.
But these days, it’s possible for cryptocurrency users to acquire tokens through many different means than buying them on an exchange. Staking rewards, tokens earned in yield farming, interest on decentralized loans, forks, airdrops – any of these may be treated as income. If this is the case, then there may be a requirement to report twice – once when you receive the tokens as income and again when you sell the tokens as a capital gain.
4. Find a provider that can help meet your needs
If you’re one of those people who’s previously dived headfirst cryptocurrency trading or DeFi and is now wondering how to untangle the complex web of transactions, then the good news is that help is at hand. Crypto tax software providers offer a suite of services that are designed to make it easy for crypto users to manage their taxes.
The exact level of automation will vary, but for instance, with Crypto Tax Calculator, an algorithm automatically categorizes transactions according to the rules of your jurisdiction, with 21 countries supported so far. You can then generate a report for filing with the software used by your national revenue service or provide it to your accountant for filing.
5. Keep on top of your portfolio and activities
Once you’ve been through the process once, you can make it easier in subsequent years by keeping on top of your transactions and portfolio. Shane Brunette, CEO at Crypto Tax Adviser, offers the following advice:
“Crypto taxes can be very difficult in some circumstances. The sooner you do it, the better, as you will be able to better remember your trading activity and be able to make sure everything is being recorded correctly.”
And for those who prefer to keep their head in the sand, what’s the worst that can happen? Shane says:
“They risk getting audited. If they are audited, they can be fined for not declaring their taxes, charged interest on any outstanding balance, and they usually have a ‘red flag’ where they are more likely to get audited in the future.”