It is probably reasonable to start with a big disclaimer: depending on your country of residence and a particular region, the taxation rules may vary. The difference may be enough to get you into trouble or to cause misunderstanding. Respectively, the legislation differences may reflect on the way how to file crypto taxes.
Always do your own research and consult certified professionals, especially when it comes to law and money.
With that in mind, let’s proceed.
How to file crypto taxes in the US
Taxation is usually seen as an over-complicated hurdle to hold small and mid-sized businesses and ordinary people back. Such a view is backed up by numerous cases of power abuse. Besides, the government and large businesses do a really good job at exploiting legislation loopholes. So, even if no one is breaking the law, the play is still foul.
Well, on the other hand, you have to learn how to report crypto on taxes, you have to learn how to report crypto gains. The service infrastructure that you subsist on is possible in part thanks to the taxation system. And if you don’t support it, you’ll get severely punished. The best course of action is to support the state policy and spare oneself any potential trouble.
How to report crypto taxes in the US: grind the documents
You could as well choose the path of least resistance and hire a certified specialist to do all the paperwork for you, and will get to this in a moment. However, if extra expenditures are not on the schedule, exploring all nitty-gritties of tax legislation in the US is the only way left.
One has to dive deep into the documents provided by the Internal Revenue Service (IRS). It was their initiative to make crypto taxable. Since 2020, there is a respective line in their “Form 1040: Individual Tax Return”:
“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
It is impossible to ignore that line. If you do not tick the checkbox although you did operate with crypto in the ways listed in there, you lie to the state. It certainly is not an advisable route to take.
The good news is that the actual percentages are different in each state. Certain taxes are completely absent: like, there is no income tax in Alaska and some other states, for example.
Cryptocurrency trading gains and losses fall into Form 8949: here is an empty form link and here is a sample how it should look after all the operations have been filed.
You may either aggregate all the gains and losses on Schedule D or detail them out.
In any case, figuring out how the Forms and Schedules relate to each other is a tedious task for a person who gets acquainted with them for the first time. Investopedia really gets to the core of this, but not everyone can afford to spend lots of time reading it top to bottom.
How to report crypto taxes in the US: hire a Certified Public Accountant
Individual taxpayers rarely have to do all the paperwork on their own because an accountant does it all for them, even if they are not aware of it. We mean regular employment.
When a job is not the only means of income for you, things get complicated. It is totally possible to learn how to do crypto taxes yourself; never underestimate your capabilities. There are plenty of good guides on this.
Overestimating oneself is a dangerous mistake, no doubt about that, so instead of wasting precious time on all the bureaucratic routines, focus on what you’re good at. Pay the people who are good at tackling the bureaucratic routines.
How to report crypto taxes in Canada
There is a really comprehensive, exhaustive guide by the government of Canada on how digital assets fall into the financial activities of Canadian citizens.
In short, individuals who trade crypto for goods, services, or other digital assets should treat these actions as barter. Barter is, by definition, an action of exchange of value that does not involve state currency. It is taxed accordingly.
Business entities should treat incomes relating to cryptocurrencies as business income. One would need a clear definition of what is a business entity and business activity to judge if their incomes can be seen as “business incomes” from a legal point of view. Here are some examples.
- Cryptocurrency mining;
- Systematic cryptocurrency trading;
- Cryptocurrency exchanges and ATMs.
How to do crypto taxes outside North America
You are not necessarily a resident of the US or Canada, which brings us back to the disclaimer: do your own research. A simple “how to do crypto taxes” query will immediately lead you to both the advertisements of accounting agencies and guides how to run the books on your own.
Search in your native language. If there is no guide, perhaps you’ll have to write one, no matter how basic and incomplete it will turn out.
After Bitcoin broke out, lots of people saw an opportunity and started to trade it for goods and services and back, although there was no appropriate legislation at the moment. They rushed the events. It backlashed on them very hard.
Reaching out to legal authorities and asking for respective permissions would be a safe and honest course of action. Attending a meeting organized by a public organization or a political party in order to discuss and propose an acceptable solution would be better. At least, they shouldn’t run their operations on a massive scale.
Liberals who idealize cryptocurrencies are disappointed that all coins lost their ground and became regulated by central authorities. Mass adoption implies central regulation so that everyone is on the common ground, one cannot avoid that.
The subtle balance between privacy and transparency, (centralization and decentralization, regulation and deregulation…) cannot be achieved in a moment, in a single clasp of someone’s fingers. All we can do, collectively, is educate ourselves and take active part in the process of lawmaking. Otherwise, the laws will always be unsatisfactory.
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