Millions of people have only recently got into the crypto market, and the dizzying highs and sudden dips 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 trades, it’s important to be aware of the ramifications of dabbling in crypto in this way. In particular, the tax implications of netting a decent return from buying and selling decentralized currencies cannot be overlooked.
Taxation is always a confusing business unless you’re an expert, so let’s go over some of the steps you’ll need to take to ensure you don’t fall foul of the authorities if you happen to enjoy a crypto-based windfall.
Check the tax laws in your region
Different states and countries have different rules on how crypto gains are taxed, with some places not levying any tax and others treating this in the same way as any other capital gain, such as income from a property portfolio or stock dividends.
In the US, for example, crypto is equivalent to property, and so gains or losses must be declared and taxed as appropriate. A similar state of affairs exists in places like the UK, Australia and other developed nations.
Because of this, it’s a good idea to calculate crypto tax which you might owe, and set aside enough to cover the amount you’ll be charged on any gains you realize in a given tax year.
One point to make is that if you don’t actually sell or trade crypto, you might not have to pay capital gains tax on it; like any asset, taxes will usually be due if you realize the gain by selling it. Just buying and holding crypto usually means that you don’t need to declare anything, although of course do check that this is true of your region.
Get an experienced accountant to assist you
Being confused by taxes on crypto gains is completely understandable, and the average person doesn’t know that much about how the system of taxation in their state or country actually works. That’s why accountants exist; they can aid you in navigating the minefield of filing taxes, whether your income is from a traditional job, from crypto trading, or a mixture of the two.
Obviously there’s a price to pay for hiring an accountant to handle your tax affairs on your behalf, but in lots of regions you’ll be able to claim back their fees as part of your tax return anyway, so it’s really not an excuse to steer clear of one.
Furthermore, as well as making sure that you properly report your crypto gains and pay the required tax amount, an accountant could actually reduce your tax burden by looking for other expenses and deductibles for which you are eligible.
Keep thorough records
The last point to make about paying taxes on crypto gains is that you can’t do this successfully if you don’t have details of the trades and transactions you’ve executed.
Most modern crypto exchanges will allow you to access and download data covering all of the purchases, sales and trades you’ve made within a given period. If you are using more than one exchange, you need to keep in mind the additional admin involved.
Even trades made outside of exchanges, from one wallet to another, might be liable for tax, depending on the size of your gains. Likewise if you make a loss, this could reduce your overall tax liability, specifically if you are trading crypto as a means of income.
So there you have it; calculate crypto taxes early and get a professional to fight your corner to avoid common mistakes.