The crypto world has come a long way since the introduction of Bitcoin in 2009. Cryptocurrency has become a popular investment option for individuals worldwide, with the market experiencing significant growth in recent years and projected to continue its upward trajectory. While there is the potential for substantial profits, it is essential to remember that with each transaction comes a responsibility to pay taxes.
Regardless of market movement, tax liabilities are a reality in crypto. And with the aggressive growth this investment class has seen in the past decade, tax authorities in many countries have noticed and implemented taxation laws requiring people to pay taxes on their crypto holdings.
In countries like the USA, Canada, Australia, and many European countries, cryptocurrency is treated as a property, asset, or commodity for tax purposes. As such, crypto gains and losses are taxed under capital gains or business income and must be reported for each taxable event. A taxable event occurs when you sell, use, or exchange cryptocurrency, but holding crypto is not taxable. Taxable events include:
- Selling crypto for cash
- Trading one type of crypto for another
- Using crypto as payment
- Mining or staking
- Receiving airdropped tokens
- Getting paid in crypto
Similarly, the sale of NFTs is also considered a taxable event. If you sell an NFT for cryptocurrency or exchange it for another NFT, that will trigger another taxable event, which will be taxed. Any royalties earned from selling an NFT you created would also be taxed as income.
On the other hand, buying crypto with fiat currency, transferring between personal wallets, gifting crypto, and donating crypto are not considered taxable events. Though, donations can be used as deductions in some jurisdictions.
Understanding the Tax Implications
Selling, trading, or using cryptocurrency as a form of payment is referred to as disposing of. When disposing of cryptocurrency, the gain or loss is calculated based on the price you paid for the crypto asset(s), also called the cost basis, and the value of the crypto when you dispose of it.
The amount of tax you will pay on disposal depends on the laws of your country, how long you hold the cryptocurrency, and your tax bracket. All transactions, regardless of whether there was a gain or loss, must be reported on your tax return. This will help determine your total earnings from the crypto earnings and the income tax bracket you belong to.
Receiving crypto from mining, staking, airdrops, or payment for goods or services is considered earning income and must be reported on your tax return.
One thing to remember when reporting your cryptocurrency gains is that you need to keep detailed records of all your transactions. This includes the date you bought the cryptocurrency, the date you sold it, and the amount you sold it for. You also need to keep records of any cryptocurrency you received as payment for goods or services and any mining rewards you received.
Crypto Tax Software
With increasing regulations and scrutiny, crypto traders must accurately calculate and file their crypto taxes. This is where crypto tax software comes in handy.
Calculating crypto taxes can be tedious, especially with the numerous transactions involved. Crypto tax software simplifies the tax preparation process for crypto traders by automatically calculating their crypto taxes. These software programs are designed for easy use, so even those without technical knowledge can benefit from them. When choosing crypto tax software, it is essential to consider a few key features to ensure a smooth and hassle-free experience, which include:
- Seamless uploads of multiple CSV files and data.
- Ability to connect to APIs and wallets.
- Prioritizing the safety of user data.
- Supporting file exports to popular tax-writing platforms.
- Ability to track transaction history and provide complete audit support.
Several crypto tax software/applications assist with the features mentioned above. Top crypto tax software solutions include Koinly, CoinLedger, CoinTracking, CryptoTaxCalculator, and Accounting. Each offers features such as integrations, automated data input, ready-to-use paperwork, and security, and they all share a commitment to helping crypto traders accurately calculate their taxes.
Koinly
Koinly, founded in 2018, is a leading crypto tax software application. It automatically tracks crypto transactions across exchange accounts and wallet addresses. It offers a consolidated overview of users’ income-generating activities, such as mining and staking. Koinly releases reliable tax reports and adheres to cryptocurrency tax laws in several countries worldwide.
CoinLedger
CoinLedger supports unlimited exchanges and provides real-time profit and loss reports. It can import tax data from various crypto platforms and offers auditing and tax-loss harvesting tools. The platform has exceptional customer support with high response rates on chat and email, and it allows for easy export of transaction data to platforms like TurboTax and TaxAct.
CoinTracking
CoinTracking, launched in 2013, is the world’s first crypto portfolio manager and tax reporting tool. It allows for the import of data from over 110 exchanges and supports direct sync with the blockchain. It analyzes your trades and generates real-time reports on profit and loss, taxes, coin value, realized and unrealized gains, and more. The platform creates tax reports for over 100 countries based on income and capital gains.
Crypto-Tax-Calculator
CryptoTaxCalculator, founded in 2018 in Sydney, Australia, offers powerful and accurate tax reports that understand the tax obligations you fall under based on your country. It integrates with over 500 exchanges, including all major international exchanges, and provides a complete breakdown of tax calculations.
Accointing
Accointing is a one-stop solution for all crypto tax problems. It automates the tax calculation process and offers various insight tools for managing portfolios. The platform provides a complete breakdown of transactions in a consolidated report to be used for many popular tax-writing platforms.
With the vast amounts of data involved in crypto investing, it can be a tedious and time-consuming task to file taxes. Crypto tax software can simplify the process, offering a comprehensive solution to all your crypto tax problems. Whether you choose any crypto tax software options, these tools can make your tax filing more accessible and efficient while ensuring compliance with all applicable tax laws.
In conclusion, it is clear that cryptocurrency is here to stay and that the tax implications of this rapidly evolving asset class will continue to be a topic of conversation for years to come. Whether you are an early adopter of cryptocurrency or a more traditional investor, it is essential to be aware of the tax implications of investing in cryptocurrency. Understanding your country’s tax laws is crucial, so you follow all applicable tax requirements when reporting your cryptocurrency gains. Therefore, by manually keeping detailed records and following the guidance on reporting cryptocurrency gains or choosing the appropriate crypto tax software, you can ensure that you comply with tax laws and avoid penalties and interest. However, crypto tax software can make the tax filing process more manageable and provide accurate calculations and reporting.
