Taxes and Crypto: A Simplified Explanation
Hot assets like cryptocurrency and NFTs seem like a great way to make some money on the side. However, non-experienced traders and investors are often unaware of the tax liability that accompany these assets. The good news? It doesn’t matter how you file a tax return, practically every online tax platform as well as tax preparation offices are fully equipped to handle this new type of investment. Just to be on the safe side though, it is important to fully understand how your crypto trades are taxed. Thankfully, it doesn’t matter how much you sold, learning about crypto taxes is much easier than learning more about blockchain. If you purchased, sold, or received crypto during the past year and you need help as tax season approaches, read on for a simplified explanation of crypto taxes.
If you sold or spent crypto, you need to pay capital gains taxes.
Imagine this: You hopped on your computer and typed in, “best cryptocurrency exchanges Canada.” You looked over various options like Coinbase, Coinsmart, and Bitbuy. Given that many of these options offer enhanced security like cold storage, support for hundreds of digital assets, and low trading fees or exchange fees, you may have even decided to sign up and create accounts for several of them. Then, you added your necessary payment option and began investing in digital currencies like Ethereum, Ripple, and Litecoin. You held them for a year or so until they appreciated, and then you sold them off to realize a profit.
As a Canadian taxpayer, you owe money on the profits that you realized in that sale. This is what’s known as capital gains taxes. Because crypto is not legal tender or fiat currency, it’s treated as an asset instead of money that’s exchanged between individuals and businesses. However, if it’s used as currency to pay for something, this still counts as a taxable event that will require you to pay capital gains taxes. Put simply, if it’s disposed of in any way and you make money, you have to pay taxes on it.
Activities like mining or otherwise earning crypto are often considered taxable as income.
While many purchase cryptocurrency for themselves, others may earn it by selling products or services in return for crypto or making it through cryptocurrency mining. In this instance, you will likely have to pay income taxes on this money earned, as you didn’t purchase it through an exchange or receive it from someone as a gift. This will be reported separately from the capital gains you realize when you decide to sell off the crypto that you’ve earned.
Because income in crypto can be so difficult to track, making sure that you have physical and digital documentation of your earnings and sales is crucial. For example, you can make sure that you have all of your mining earnings or business earnings tucked away in tax folders that are easily accessible in your office. If you’re paying employees to do work for you, you can also track this information and have office supplies like tax envelopes on hand to make tax season easier on you when it rolls around. Investing in custom folders and products is a great way to stay organized and label everything you use throughout the year. When it comes to crypto reporting, you can never be thorough enough!
Reach out for professional support to file crypto taxes.
While learning how crypto is taxed can be simple, filing all of the necessary paperwork and calculating trades may not be. If you need support, make sure to use professional tools or reach out to a tax expert who can help you along the way. The last thing you want is to find yourself in legal trouble because you made an error in reporting.
Cryptocurrency is still very popular. However, not everyone who invests knows the consequences of buying and selling some of their own. If you’ve sold digital assets in the past year, use the guide above to better understand cryptocurrency taxes and how you can prepare for tax season.