Tax Season: Simplifying your crypto and taxes
Crypto investors have endured a rollercoaster of emotions over the past year as the markets swung wildly — leaving many in a tailspin for long periods. In fact, the crypto market fluctuated with such volatility that it was akin to playing a video game as opposed to investing in a real asset class.
While this may have been an exhilarating experience for crypto investors, there is always a stage of the year when things become a little more subdued — yes, that’s right — tax season is upon us, and that includes paying taxes on your crypto investments too.
The UK tax season closes on 5 April 2022, while the US follows hot on their heels with a closing date of 15 April 2022. While many in the crypto community have contrasting views on tax contributions for crypto investments, the bottom line is — Yes, cryptocurrencies are taxable, depending on what you are doing with them.
Tax officials worldwide generally view crypto transactions in the same way as if you were buying or selling stocks, bonds, or other financial assets. So whether you are an active trader or enjoy online shopping with your crypto, read on as we dive into some important tax-related matters about your crypto.
When to report crypto on your tax return
If you happen to buy cryptocurrencies and then sell them, you will be liable to contribute tax in the same way as if your cryptocurrency was a stock. You will need to pay short-term capital gains tax if you held your position for less than 12 months or long-term capital gains tax if your position was held for over a year.
The long-term capital gains tax rate is more favorable for many taxpayers, typically capped at 15% on most transactions. However, these are taxed at your ordinary-income tax rate for short-term capital gains contributions.
If you are just buying cryptocurrencies with US dollars, there is no need to report that transaction, and no tax will be imposed. Hypothetically, you will not be liable for any tax if you choose to hold on to that cryptocurrency forever. The only time you will need to pay tax on your crypto purchase is if you sell or exchange it for a profit in the future.
When you’ll owe tax on crypto
If you use your crypto to buy things like beverages or clothing regularly, it is wise to record all the details of your transactions, as you will likely have to pay tax on those purchases. In circumstances where you use your crypto for goods or services, you are technically converting your cryptocurrency to dollars and using those dollars to make your purchase.
In essence, tax officials view such purchases of goods or services with crypto as sales of crypto. If your crypto is worth more than when you initially acquired it, that transaction will be classified as a taxable gain.
In cases where you successfully mine cryptocurrencies, you are typically rewarded with tokens or coins for your efforts. Tax officials see this you are being paid a financial reward for the work undertaken on the blockchain, and as such, these financial rewards are taxable income.
With that being said, you will need to contribute to ordinary income tax on the value that you received — whether you sold those cryptocurrencies or not. In addition, where you have sold your crypto, you may also be subject to capital gains tax if the value of those digital coins has risen after you gained possession of it.
Final thoughts
Depending on your location, you will need to check with your local tax offices on the relevant forms to be filled out and submitted for your tax contributions. You must ensure that all your crypto transactions are reported on the correct forms, including amounts and dates.
Any information related to your earnings from cryptocurrency mining is typically filled and submitted on a separate form or a separate section of your tax contribution form. Make sure to confirm that with tax officials in your area as your mining operations are classified as a business liable for self-employment tax.
If your budget allows, it is highly recommended to use the services of a crypto tax practitioner who is au fait with all crypto tax-related matters and will be best placed to ensure that your tax forms are correctly filled.
Keep in mind that failure to disclose any income derived from your crypto-related activities could land you in hot water with the authorities. Therefore, honesty is the best policy when it comes to your crypto tax returns. Good Luck!
