Though it has become a popular investment in the finance industry, crypto has yet to become legal tender. As such, it can be challenging to find information about crypto taxes.
Which crypto coins are taxable? What kind of tax does cryptocurrency incur? Do you need to file for crypto tax in the first place? Find out below.
Do You Need To File For Crypto Tax?
If you look into this Source Tax Facts, you’ll find that Australia doesn’t consider crypto as fiat currency. The Australian Taxation Office (ATO) considers crypto as an asset, a capital gains tax (CGT) asset, to be precise. Most countries’ taxation office sees it in the same way, including the US’s Internal Revenue Service (IRS).
As a general rule of thumb, individuals must report any profit or loss from the assets they own. So, yes, you must include any profit or loss you make from cryptocurrency in your tax returns.
However, keep in mind that this only applies to profit and loss. If you were to buy crypto, you wouldn’t need to file it for taxes immediately. This is because you simply own crypto. You have yet to make a profit or loss out of it. In short, crypto is taxed like any other asset. But, of course, this begs the question, “What does the IRS consider a profit or loss from cryptocurrency?”
When Do You Have To File For Crypto Tax?
There are two general instances where you have to file for crypto tax. Here’s a look at each one:
- When you dispose of the crypto asset in any way. Examples of scenarios that fall under this category include the following:
- Selling crypto on the market
- Exchanging crypto for another asset (shares, bonds, commodities) or currency
- Using crypto as payment for products or services
- When you receive payment in the form of crypto. Examples of scenarios that fall under this category include the following:
- Accepting crypto as a payment from a client for your services
- Receiving crypto as payment from customers of your retail store
- Accepting crypto as a salary from your boss in your regular job
If you’ve ever done any of these, then you must file for crypto tax. It’s worth noting that these two instances will incur different kinds of tax, which is discussed in the next section.
What Kind Of Tax Is Crypto Subject To?
Cryptocurrency can be taxed in two different ways. The first instance mentioned earlier will incur a capital gains tax, while the second instance will require you to pay income tax.
Capital gains tax is the type that you must pay on any profit you gain from the exchange or sale of an asset. Meanwhile, income tax is the earnings from your job or business. It may also come from the regular earnings you receive from interests, royalties, and dividends.
When you earn profits using crypto, you have to pay either one and never both for the same transaction. You can find the specific scenarios that apply to each type in the previous section.
Though the type of crypto tax you must file varies according to your scenario, there are countries that consider only one type of crypto tax. For instance, Australia, as stated earlier, sees crypto as a CGT asset, meaning it would only incur capital gains tax and never income tax. Each of these types has different rates and mechanics as to how you must calculate the crypto tax.
How Do You Calculate The Crypto Tax You Must Pay?
The calculation for income tax is rather simple. You simply have to take the total amount of crypto income you earned throughout the year. You then take that amount, multiply it by the respective tax rate, and you now have the amount of tax you must pay. As a reference, in the US, the income tax rate ranges from 10% to 37%, depending on your social status and income.
The calculation for capital gains tax is a bit more complex. The first step is to get the sum of the capital gains and losses you’ve made within the year. For your information, capital gains are the difference between an asset’s price when you bought it and its price when you sold it.
Suppose you bought 1 Bitcoin on July 29, 2021, for approximately USD$40,000. After waiting for four months, you then sold the same amount of Bitcoin on November 17, 2021, for around USD$60,000. The difference between the two (USD$20,000) is your capital gain. But if you waited for longer and sold it on June 11, 2022 for USD$20,000, then you wouldn’t have gained money. Instead, you’d have lost USD$20,000. This is not capital gain, but capital loss.
The second step to get the amount of capital gains tax you owe is to multiply the sum of your capital gains and loss by the corresponding tax rate, which depends on the type of capital gain.
There are two types of capital gains: (1) short-term and (2) long-term. Short-term capital gain is when you sell an asset you’ve been holding for less than a year. Long-term capital gain is when you sell an asset you’ve been holding for more than a year. The tax rate for short-term capital gain is similar to income. Meanwhile, the long-term capital gains tax rate is lower.
In the US, the long-term capital gains tax rate ranges from 0% to 20%. That’s why investors often wait for a year before selling the assets they bought, effectively reducing the taxes they owe.
Filing taxes is stressful enough as it is. And now that you have to include crypto taxes as well, you’ll most definitely have a harder time. Still, with this guide, you should now at least know how crypto tax works and how best to approach it. It’s also a good idea to get yourself a tax advisor if you wish to make your tax returns smooth-sailing.
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