Crypto has only recently become a widely-accepted payment system. As a result, new tax regulations on cryptocurrency are causing major concerns for crypto traders everywhere. For example, some countries, like Portugal, are changing their regulations. Portugal’s proposed 28% capital gains tax, is a sign of changing sentiments worldwide.
Hence, it’s a worthy cause for crypto traders to keep up with the latest tax news. However, this is not as easy as it seems. Thankfully, our guide explains everything you should know about crypto tax. So let’s explore exactly how countries tax crypto and address some important crypto FAQs.
Taxation on cryptocurrency is similar to other forms of financial assets. There is a general tax reporting process traders are subject to. For example, the cryptocurrency tax rate, taxable transactions, and how you calculate your taxes owed can vary.
Note: Short-term capital gains tax for crypto vary depending on region and country of residence. Please be sure to check the rules where you live before filing.
Most crypto tax rates on short-term capital gains vary from about 10-37%. The rate depends on how much profit you are making and if you’re filing as an individual or married. It also depends on how long you owned your crypto before generating gains from it. Be sure to look up which tax bracket you belong to in your country.
You can then report your crypto short-term capital gain tax to the proper body - in the USA, you report to the IRS. If you’re in Canada, you need to report to the CRA. Find the right form, and fill it out. It will ask for information like:
If you made any kind of profit off of short-term capital gains, you will trigger capital gains tax. There are several situations in which a person will owe taxes on their crypto trades. These include:
Tax-collecting bodies consider short-term capital gains as ordinary income. They have different tax rates than long-term capital gains or other financial assets. If you own the crypto assets for less than one year (365 days), it’s considered a short-term capital gain. If you held the cryptocurrency for over a year before you sold or loaned it, it becomes a long-term capital gain.
It doesn’t matter what you did with your crypto - as long as your holding period was less than a year, it will be taxed as ordinary income. Even if you received crypto as a payment and left it alone in your account for months, you will need to pay taxes on it. Make sure to keep track of how long you’ve held all your crypto assets, and how you disposed of them.
Taxes can take a significant percentage out of your net profit from crypto. If you want to decrease your tax payment, there are several methods to avoid them. These strategies are legal and will maximize your take-home capital gains.
Holding your crypto for over a year is the easiest way to avoid crypto short-term capital gains tax. Long-term capital gains tax rates range from 0-20%. This is lower than short-term capital gains tax crypto rates, no matter the tax bracket.
The higher your gains, the more tax you’ll need to pay. You can offset gains by claiming losses on other crypto investments. Before you cash out on a crypto transaction, check your portfolio for losing crypto investments.
You can sell your losing crypto at the same time. If your losses outweigh your gains, you can carry the loss forward into the next year. Your claim on the losses will lower your taxable income. This strategy is called tax loss harvesting.
Suggested reading: Tax Loss Harvesting - Understanding the Basics
You can pad your retirement fund with unique assets, including cryptocurrency. You can buy crypto to invest in your IRA (individual retirement fund) in the USA, UK, Canada, and more. By doing this, you can avoid tax on your crypto entirely.
In some places, like the UK, crypto transactions between a married couple are exempt from tax. You can transfer your crypto assets between yourself and your civil partner. Since you are a unit, tax collecting bodies consider these transactions ‘no gain, no loss.’
If you move, retire, take a lower salary, get married or divorced, you might qualify for a lower tax rate. All these factors can move you into a new tax bracket. You can make life changes strategically before reporting your income.
You should always look up your country’s tax policies to find out ‘how is crypto taxed’ there. You can do so by finding a country-specific crypto tax rate calculator. This is far more efficient and convenient than slogging through pages of tax forms and laws.
A good crypto tax rate calculator will allow you to add data on your transaction history. You can upload it directly from your crypto trading account. It will help you catalog different kinds of transactions by syncing your digital wallet. Then, the calculator will generate a detailed tax report for your financial year.
This is the perfect resource to use when reporting your short-term capital gains tax. There are penalties for not properly reporting your taxable crypto gains. You could incur financial penalties, interest on your tax, or even criminal charges.
No one likes paying crypto taxes - whether that’s short-term capital gains or long-term capital gains. However, while we don’t like paying taxes, they are a part of our society. We can’t avoid them. However, we can strategically minimize our taxes using some of the methods above.
YouHodler stands by the fact that all financial activity should be disclosed in good faith, even if you are uncertain about it. Potential penalties received from misreporting taxes may be more than just paying the tax itself. Hence, honesty is always the best policy in this regard.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.