Chapter 1: Understanding Crypto Taxes
What is Cryptocurrency Tax?
Cryptocurrencies are subject to capital gain taxes in many countries. In the United State, the Internal Revenue Service (IRS) treats all cryptocurrencies as capital assets, and you owe taxes when they’re sold at a profit. This is the same thing that happens when you sell more traditional investments, like stocks or funds, at a gain.
To calculate your taxes, you will need to consider your capital gains and losses. You may also have to pay income taxes if you receive crypto as payment.
Because every jurisdiction applies different crypto tax rules, it is recommended you consult a tax advisor to handle your crypto taxes. Tax authorities frequently cooperate with crypto exchanges to track crypto transactions. If you attempt to evade tax, you can end up with financial penalties and even harsher punishments.
How much you own in capital gains taxes depends on whether you’ve held your crypto for less than a year or more than one year. If you haven’t quite reached 12 months, your profits are taxed at short-term capital gains rates, a.k.a. your regular income tax rate. But if it’s been at least one year since you purchased your coins, you’ll qualify for a long-term capital gains rate that’s lower than most income taxes, depending on your taxable income.
What’s a taxable event?
A taxable event is a transaction or activity you're required to pay taxes on. However, taxable events vary from country to country, so what serves as a taxable event in one country might not be one in another.
Typically, transactions involving the sale of commodities, investments, and other capital assets are all taxable. Purchasing cryptocurrencies with fiat currency is unlikely to be a taxable event. However, selling or trading your crypto is likely to be taxed.
A taxable event will leave you with capital gains (profit) or capital losses. If you trade an asset you're holding at a profit, you've made capital gains. If you trade or sell that asset at a loss, you've incurred capital losses.
Depending on your country’s tax authority, you may be able to deduct capital losses from your capital gains to reduce your taxes. Your overall amount of tax depends largely on the sum of these together. To help calculate this, you should note the date, cost basis (purchase price), sale value, and fees associated with all trading transactions.
Taxable and non-taxable events
These are considered taxable events:
Receiving cryptocurrency as a result of a fork, airdrop, or mining.
Selling cryptocurrency for fiat currency (i.e., converting BTC or ETH to USD, CAD, etc.).
Trading cryptocurrency for another cryptocurrency (e.g., BTC for ETH).
Spending cryptocurrencies. In jurisdictions including the US, UK, Canada, and Australia, directly spending your crypto on goods or services can incur taxes if you made profits.
Non-taxable events include:
Donating cryptocurrency to a tax-exempt organization.
Buying cryptocurrency with fiat currency (except in cases where the purchase price is lower than the fair market value of the purchased coin).
Gifting cryptocurrency under a specific limit.
Transferring cryptocurrency from one wallet you own to another wallet you own.
