Millions of people recently entered the cryptocurrency market, and the dizzying ups, downs and sudden drops of this volatile ecosystem make it an exciting place to invest.
However, while you can turn a small sum into a sizable one with a few favorable exchanges, it is important to be aware of the ramifications of dabbling in crypto in this way. In particular, the tax implications of making a decent return from buying and selling decentralized coins cannot be overlooked.
Taxes are always a confusing matter unless you’re an expert, so let’s go over some of the steps you’ll need to take to ensure you don’t breach the authorities if you enjoy a crypto-based windfall.
Check the tax laws of your region
Different states and countries have different rules on how crypto gains are taxed, in some places they are not taxed at all and in others they are treated the same as any other capital gains such as income from a property portfolio or stock dividends.
In the USAFor example, crypto is equivalent to property, so gains or losses must be reported and taxed accordingly. A similar situation exists in places like the UK, Australia and other developed nations.
Because of this, it is a good idea calculate crypto tax you might owe, and set aside enough to cover the amount you’ll be charged for any profit you make in a given tax year.
One point to note is that if you don’t actually sell or trade cryptocurrencies, you may not have to pay capital gains tax; Like any asset, you will generally have to pay taxes if you make a profit on selling it. Simply buying and holding crypto generally means you don’t need to declare anything, though of course check to see if this is the case in your region.
Get an experienced accountant to help you
Being confused by taxes on crypto earnings is completely understandable, and the average person doesn’t know much about how the tax system actually works in their state or country. That’s why accountants exist; they can help you navigate the tax filing minefield, whether your income comes from a traditional job, cryptocurrency trading, or a combination of both.
Obviously, there’s a price to pay for hiring an accountant to handle your tax affairs on your behalf, but in many regions you’ll be able to claim their fees as part of your tax return anyway, so there really isn’t an excuse to steer clear of one.
Also, in addition to making sure you correctly report your crypto earnings and pay the required amount of tax, an accountant could reduce your tax burden by looking at other expenses and deductibles you’re eligible for.
Keep complete records
The last point to note about paying taxes on crypto profits is that you cannot do it successfully if you do not have details of the trades and transactions you have executed.
Most modern crypto exchanges will allow you to access and download data covering all the purchases, sales, and transactions you have made in a given period. If you are using more than one exchange, you need to be aware of the additional administrator involved.
Even transactions made outside of exchanges, from one wallet to another, may be subject to tax, depending on the size of your earnings. Similarly, if you make a loss, this could reduce your overall tax liability, specifically if you are trading cryptocurrencies as a means of income.
So there you have it; calculate crypto taxes in advance and get a professional to fight for your corner to avoid common mistakes.