Tuesday, November 5, 2021

Crypto Trading: Dealing with Taxes

No one likes paying their taxes but we all have to whether we are trading stocks, bonds, forex markets or even cryptocurrencies. Well for crypto trading, it can get a little complicated and this article we will be looking at some of the ways in which we can treat out crypto trades in relation to paying taxes.

One thing that is important to note is that cryptocurrency is not treated the same across the world. There are economies that are more developed than others (looking right at you America) with a little bit more developed rules on how to handle cryptocurrency and there are those whose governments are still in denial of the existence of digital assets.

So the first thing to consider when it comes to accounting for your cryptocurrency trades is to know how your local jurisdiction feels about digital assets. Some think it’s a cool idea but have not yet come up with the necessary framework to regulate it let alone tax it. Others are in the process of creating those rules while still in others, these assets are illegal to be traded so be careful not step on the law enforcement toes.

We will consider the US’ tax law as that is easily the best example you can find as to how governments that have accepted the use of cryptocurrencies are treating gains in this asset class. The IRS (Internal Revenue Service) - the US’ tax authority - gave guidance back in 2014 on how it was planning on taxing cryptocurrency trades and investment activities. The IRS Notice 2014-21 defined digital assets as property for the purposes of tax. This means that the IRS now treats bitcoin and its siblings similar to how it treats stocks and bonds. Any gains or losses on your trades and investments fall under capital gains and losses.

Here’s a simple calculation on getting a capital gain or loss. Let’s assume you bought bitcoin worth $1,000 and held it for a few weeks. Within time, the value of your coins rose by 25% and now their market value is $1,250. The Capital gains calculation is:

Fair Market Value — Cost Basis = Capital Gains

$1,250 - $1,000 = $250

The Capital gains for this transaction is $250 and this would be liable for tax remittance. The reverse of this transaction is also true. If instead of a gain, your coins fell in value in the same period, then you now have a capital loss and you will be able to claim a tax deduction equal to the value of the coins you lost.

As we mentioned earlier, the calculations vary according to your jurisdictions and we do not recommend anything, however, if you plan to engage in crypto trading, it would be advisable to consult with an informed tax consultant in your local area to ensure that you play by country and state rules.

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Crypto Trading: Dealing with Taxes