Guide to Cryptocurrency Tax in Australia

TAX GUIDE

Guide to Cryptocurrency Tax in Australia

Updated June 8, 2020

In this guide, you will learn everything you need to know about bitcoin and cryptocurrency taxation in Australia. We cover how to calculate your taxes, how to minimize your capital gains, and what is required to be reported by the Australian Tax Office. You will also learn how to generate and file your crypto tax reports.

Coinpanda is provided for informational purposes only. We do not guarantee that our understanding of the cryptocurrency tax rules detailed below is in fact correct, or up to date according to the latest regulations. This service is not intended to substitute for tax, audit, accounting, investment, financial, nor legal advice. Please see our full disclaimer.


1. Crypto taxation in Australia

With cryptocurrencies such as bitcoin becoming more popular and used by an increasing number of people, many Australians are now wondering about the possible tax implications it may have. Tax rules can be difficult to fully understand, and especially with regards to cryptocurrencies which is a very new phenomenon.

Luckily, the Australian Tax Office (ATO) has issued guidance to the taxation of bitcoin and other cryptocurrencies to help people in Australia file and report their taxes according to the law. This tax guide breaks down all the difficult jargon to simpler terms so that you will gain a better overview of the current tax implications.

In Australia, capital gains are taxed at the same rate as the marginal income tax rate. Refer to this page for the latest applicable income tax rates.

Essentially, each disposal of a cryptocurrency asset can trigger a taxable event. This means you will need to calculate capital gains tax (CGT) each time you sell, trade, or pay for goods or services with a cryptocurrency. In Section 3 we will look closer at each type of disposal together with practical examples.


2. How to calculate capital gains

A capital gain occurs when you sell a cryptocurrency for more than the original purchase price. On the other hand, if the sales price is lower than the purchase price, it is considered a capital loss. All values used to determine a capital gain or loss must be in Australian dollars at the time when the transaction happened.

If you for some reason cannot establish the original purchase price, the safest option is to consider the value to be zero. If you have received cryptocurrency from mining, staking, or airdrops, you should use the fair market value in AUD at the time of receipt as your initial purchase price.

The Australian Tax Office has not published official recommendations for which accounting method to use for calculating capital gains. Taxpayers are free to choose between FIFO (First in First Out) and LIFO (Last in First Out), similarly to many other countries. The former accounting method, FIFO, is in general recommended by most tax accountants today.

Most cryptocurrency tax software like Coinpanda supports both FIFO and LIFO cost basis methods, and calculates your capital gains for cryptocurrencies automatically.


3. Buying, Selling & Trading

Not all transactions with cryptocurrencies are taxed in Australia. This Section breaks down the current tax rules for different transaction types.

Buying cryptocurrency (Ex: AUD → BTC)

You are not taxed when buying cryptocurrencies with Australian dollar or other fiat currency (as long as you own what you bought). This is similar to almost all countries today.

Note that it’s important to keep track of all your purchases and complete transaction history so that you can calculate your cost basis and deduct the costs if you decide to sell the crypto later.

Selling cryptocurrency (Ex: LTC → AUD)

Selling cryptocurrency is considered to be a disposal by the ATO and is therefore a capital gains tax (CGT) event. If you have done so, you will need to work out the capital gains for each transaction. The ATO states clearly that each individual cryptocurrency is a separate CGT asset and should be valued separately. This means you need to calculate capital gains for bitcoin, ethereum, litecoin, etc separately.

Exchanging cryptocurrency (Ex: BTC → ETH)

The guidance issued by the ATO states clearly that exchanging (or trading) one cryptocurrency for another, is similar to disposing one CGT asset and acquiring another CGT asset.

Further, the guidance states that the sales proceeds should be accounted for in Australian dollars by looking up the fair market value of the cryptocurrency received. If you cannot value the crypto received at the time of the transaction, you can find the market value (in AUD) of the cryptocurrency sold instead.

Transactions with stablecoins (Ex: XRP → USDT)

Stablecoins such as Tether (USDT), TrueUSD (TUSD), and Paxos (PAX) are treated similarly to any other cryptocurrency by the ATO. Hence, all transactions with stablecoins are taxed in a similar fashion to trade transactions as explained above.

EXAMPLE 1

– Selling cryptocurrency

Callum bought 8 ETH (ethereum) for $800 in 2017. One year later he buys 2 ETH for $450. Now, Callum owns a total of 10 ETH which he has paid a total of $1,250 for.

In January of 2020, Callum decides to sell his entire investment. He sells 10 ETH and receives $2,400 in exchange. His transactions can be seen in the below table:

TypeDateAmountPriceCost BasisCapital Gains
Buy2017-06-088 ETH$800$800
Buy2018-04-172 ETH$450$450
Sell2020-01-2810 ETH$2,400(?)(?)

To calculate his capital gains, Callum needs to find the total cost basis for the 10 ETH he has sold. This is simply the total initial cost ($1,250) since he is now selling his entire investment. The total capital gain is then found as $2,400 – $1,250 = $1,150.

TypeDateAmountPriceCost BasisCapital Gains
Buy2017-06-088 ETH$800$800
Buy2018-04-172 ETH$450$450
Sell2020-01-2810 ETH$2,400$1,250$1,150

Now that Callum has worked out his capital gains, he simply needs to report this value on the annual tax return so that he will be taxed as per his marginal income tax rate.


4. Margin & Futures Trading

Margin trading has become very popular in the last few years, and many crypto exchanges offer this like BitMEX, FTX, and Bybit for example. Instead of buying or selling cryptocurrency you actually own, margin trading lets you borrow funds from the exchange to speculate if the price will go up or down in the future. The former is often referred to as going long, while the latter is going short. Futures and derivates trading works in a similar fashion, ie. you borrow funds when you make a purchase or sell order.

When you trade futures on an exchange like BitMEX, you will open a position each time you make a buy or sell order. When the position is closed, you will have made either a gain or loss.

The Australian Tax Office has not yet issued specific tax guidance for the treatment of margin trading. A safe approach is to include the gains or losses in your total capital gains calculations. A crypto tax solution calculates your capital gains for margin trading automatically so you don’t have to do this manually.


5. Taxable income from Mining & Staking

Mining of cryptocurrency

Cryptocurrency received as payment for mining is subject to tax treatment in almost all countries, with Australia being no exception. How much you will pay in taxes depends on whether your mining activity is classified as a business or just a hobby. Refer to this site to better understand if you are in business or if your activity is simply classified as a hobby by the ATO.

If you are mining cryptocurrency as a hobby, you will need to pay capital gains tax when you dispose of the received cryptocurrency later. Since you did not pay anything when acquiring the assets, you should use a cost basis equal to zero. You are not allowed to make any deductions from associated costs.

However, if you are mining as a business, any income received would be included in your assessable income. You can use relevant market rates from reputable exchanges to determine the value in Australian dollars. You are allowed to deduct certain expenses that are directly related, eg. electricity costs.

Cryptocurrency received from mining is treated as trading stock. When you are in a business, the assessable income is both proceeds from the disposal of trading stock, but also an increase in the total of your trading stock value at the end of the year compared to the initial amount at the start of the year. This means that even if you don’t sell any of the cryptocurrency received from mining, you might still have an assessable income that will be taxed.

You will pay tax on the net income (your total income less deductions) at your marginal tax rate.

Staking of cryptocurrency

The Australian Taxation Office mentions the taxation of staking rewards briefly in their guidance. Tokens received as staking rewards should be reported as assessable income at the time the tokens were received.

If you later decide to sell the tokens, the cost basis (acquisition cost) will be the same as what you reported as your assessable income using the fair market value at the time they were derived.


6. Tax on Airdrops & Hard Forks

Tax on Airdrops

Airdrop of cryptocurrency tokens is often done as part of a marketing or advertising campaign. In some cases, you will need to register before a deadline to become eligible to receive tokens. You may also receive tokens just from holding another cryptocurrency in your wallet or on an exchange.

Similar to tokens received as staking rewards, tokens received through an airdrop are classified as ordinary income at the time when it became in your possession. You should look up the fair market value (eg. from a reputable exchange) to determine the value in AUD.

Tax on Hard Forks

Blockchains, e.g. the bitcoin blockchain, need to be updated from time to time. Such updates can result in a soft fork or hard fork. Updates that automatically get adopted by all participants is called a soft fork. This does not result in the creation of new tokens or a new blockchain. A hard fork, on the other hand, can result in a blockchain split where new tokens come into existence.

The Australian Taxation Office has provided guidance for the tax treatment of such chain splits. Cryptocurrency received from a hard fork should neither be taxed as ordinary income or as capital gain at the time when the split happened. Instead, you will make a capital gain when you actually dispose of the coins later. The cost basis of the received cryptocurrency should be considered as zero which makes sense since you did not pay anything to acquire them.

In most cases, Coinpanda classifies airdrops and hard forks automatically when you import your transactions from a wallet or exchange. On the Tax page, you will see a total overview of your crypto received as income, airdrops, hard forks, etc.


7. Tax on ICOs & IEOs

ICOs (“Initial Coin Offerings”) and IEOs (“Initial Exchange Offerings”) are a popular form of raising capital by companies and projects launching their own blockchain or token. In both cases, a person typically invests in a token that will be released in the future and pays with another cryptocurrency like bitcoin or ethereum.

The Australian Taxation Office has not provided specific guidance for the treatment of ICOs or IEOs, but since this is very similar to a crypto-to-crypto transaction, we can treat such transactions similarly for tax purposes. If you invest in token XYZ and pay with bitcoin, you will have to calculate capital gains on the bitcoin disposed of. You will need to use the fair market value of bitcoin on the date you made the investment which will also become the cost basis for the newly purchased tokens.


8. Cryptocurrency Gifts & Donations

As stated in the guidance issued by the ATO, gifting cryptocurrency is considered a disposal similar to selling. This means you need to work out the capital gains of the crypto if you transfer it to someone else. It doesn’t matter if you don’t receive anything back, it is still considered a disposal and CGT event.

On the contrary, receiving bitcoin or another cryptocurrency as a gift from someone is not considered a CGT event, but you do need to calculate the fair market value (in AUD) at the time you received the gift. This will become your cost basis which you need to calculate the capital gain or capital loss if you decide to dispose of the coins later.


9. Cryptocurrency Loans

If you are lending out your cryptocurrency on an exchange and receive interest, this should be considered as taxable income and needs to be reported. The ATO seems to not mention this specifically in their guidance, but a safe approach is to treat cryptocurrency received as interest similar to staking.

This means you should report it as assessable income using the fair market value at the time of receipt.


10. Tax on income as Cryptocurrency

Today, some employers are giving the option to their employees to have their salaries paid out in cryptocurrency instead of Australian dollars. The ATO states that crypto received as payment for salary or wages is considered a normal salary, and you should return the value of the cryptocurrency received on your income tax return.

If you are in doubt what you need to report, your employer should provide you with a payment summary (together with other reportable fringe benefits if any) for each income year. You need to convert the value into AUD using price data from reputable exchanges on the day you received the cryptocurrency as salary.


11. Minimize your Taxable Gains

There are several ways you can minimize your taxable gains and tax liability in Australia. First, it’s important to establish if you are considered to own cryptocurrency as an investment or if you are carrying on a business.

Deduct cryptocurrency losses

Cryptocurrency as an investment

As already mentioned in this guide, if you own cryptocurrency simply for investment purposes, you will have to pay capital gains tax when you dispose of the assets later. You can use any capital losses to offset your capital gains. This means that if you have invested in a cryptocurrency that has lost value, selling all your coins will trigger a capital loss that can be used to reduce your total capital gains realized from other disposed assets.

You can also use any capital losses to offset capital gains in the future, but you are not allowed to deduct the loss from your other taxable income (eg. salary).

Cryptocurrency businesses

If you are considered to be carrying on a business in the eyes of the ATO, all your profits and income from cryptocurrency will be considered as part of your total assessable income. This means that any losses can also be used to offset other income during the same tax year.

Keep in mind that the Non-commercial loss rule needs to be taken into account to work out if you need to offset or defer your loss.

Personal use asset

In Australia, you might actually disregard some capital gains (and capital losses) from the disposal of cryptocurrencies under certain circumstances. If the cryptocurrency is considered to be a personal use asset, you can disregard capital gains for CGT purposes it the asset was acquired for less than $10,000.

A cryptocurrency is not considered a personal use asset if any of the following conditions are met:

  • the cryptocurrency is held as an investment
  • used in a profit-making scheme, or
  • used in the course of carrying on a business.

The most important thing to consider when deciding if an asset is a personal use asset or not is the time between acquiring the asset and spending it. Generally speaking, the longer you hold the cryptocurrency before actually using it (for example to pay for coffee), the less likely it will be a personal use asset from the ATO’s perspective.

You can read more about the treatment of cryptocurrency as personal use assets here.

Capital gains tax (CGT) discount

As already discussed, you might have to pay capital gains tax (CGT) if you dispose of a cryptocurrency for a higher price than what you originally purchased it for. However, if you hold the investment for 12 months or longer, you might actually reduce your tax burden by taking advantage of what is called CGT discount.

There are three criteria you need to pass in order to be eligible for the discount:

  • you’re an individual, trust or complying super fund
  • you acquired the cryptocurrency at least 12 months before disposing of it
  • you did not choose to use the indexation method

You will need to document the actual holding time for each disposal you make, so it’s important to keep track of all your transactions on different exchanges. The following discount rates apply if you can take advantage of the CGT discount rule:

  • 50% for individuals and trusts
  • 33.33% for complying super funds and eligible life insurance companies
  • No CGT discount applies to foreign resident individuals after May 8, 2020

It’s important to note that you can only reduce the capital gain after deducting all capital losses first. More detailed information about the discount method can be found on the ATO’s website.

Trading fees

Most exchanges charge trading fees when you buy, sell, or trade cryptocurrency. Trading fees are considered deductible costs that can be deducted from the sales proceeds amount.

If you have a large number of transactions, deducting the fee amount can make a significant impact on your total tax liability. Most crypto tax solutions like Coinpanda does this automatically for you.

Lost and stolen cryptocurrencies

You might be entitled to a capital loss if you no longer have access to your crypto assets if you lose your private keys or become a victim of fraudulent actions. See the next Section for more on this topic.


12. Loss or theft of cryptocurrency

To determine if you may be able to claim a capital loss due to no longer having access to your cryptocurrency, you need to first consider if the asset can be replaced or not. If you actually lost your private keys, and there are no ways to recover them, most likely the cryptocurrency can’t be replaced either.

The same rules apply for theft of cryptocurrency. The ATO has published guidelines for evidence you must provide in order to claim a capital loss:

  • when you acquired and lost the private key
  • the wallet address that the private key relates to
  • the cost you incurred to acquire the lost or stolen cryptocurrency
  • the amount of cryptocurrency in the wallet at the time of loss of private key
  • that the wallet was controlled by you (for example, transactions linked to your identity)
  • that you are in possession of the hardware that stores the wallet
  • transactions to the wallet from a digital currency exchange for which you hold a verified account or is linked to your identity

13. How to file your tax reports

Filing and reporting cryptocurrency taxes can sound complicated and intimidating at first. The whole process can be summarized in the following five steps:

  1. Download the transaction history from all exchanges where you have bought or sold any cryptocurrency. To calculate your cost basis correctly, it is important to include the history for ALL previous years.
  2. Review your transaction data and make sure that the calculated balance matches your actual portfolio.
  3. Look up and assign market rates to all transactions which do not include Australian dollars (Ex: ETH → LTC). This is required to calculate the cost basis correctly.
  4. Determine the cost basis value for each transaction according to either FIFO or LIFO.
  5. File your crypto taxes before the deadline. You can file your taxes either online or complete a paper tax return.

This can be a very tedious and complicated process for most people that have had more than a few transactions during the year. Most crypto investors prefer to use a cryptocurrency tax solution such as Coinpanda to help them with calculating and filing their annual tax report. Coinpanda simplifies this process by carrying out steps 1 to 4 automatically.


14. Record keeping of transactions

The ATO puts the responsibility of keeping records of all transactions on the taxpayer itself, whether you are holding cryptocurrency as an investment or are carrying out a business. Many cryptocurrency exchanges keep these records for a limited time only, so you should make it a habit to periodically export and save this information.

The following records related to your crypto transactions should be kept:

  • the date of the transactions
  • the value of the cryptocurrency in Australian dollars at the time of the transaction
  • what the transaction was for and who the other party was (eg. the exchange or a wallet address)

It is vital to keep good records to make it easier to work out your capital gains and meet your tax obligations. Coinpanda’s tax product can create a capital gains report with all of this information for you.


15. Crypto tax deadline

The tax year in Australia is from July 1 – June 30 the following year. If you are completing your tax return for 2019/2020, it needs to be filed by October 31, 2020. Remember that filing after the deadline can lead to penalties and fees.


16. How can Coinpanda help?

Coinpanda is a cryptocurrency tax solution built to simplify and automate the process of calculating and filing your crypto taxes. Coinpanda lets you do this in four simple steps:

  1. Import all your transactions using API keys or CSV files
  2. Verify that your data is matching (and make necessary adjustments if required)
  3. Coinpanda calculates your capital gains for each cryptocurrency
  4. Download a tax report that can be submitted to the Australian Taxation Office (ATO)

Get started for free to find out more.


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Guide to Bitcoin & Crypto Taxes in Canada

TAX GUIDE

Bitcoin & Crypto Taxes in Canada

Updated June 7, 2020

In this guide, you will learn everything you need to know about bitcoin and cryptocurrency taxation in Canada. We cover how to calculate your taxes, how to minimize your capital gains, and what is required to be reported by the Canada Revenue Agency. You will also learn how to generate and file your crypto tax reports.

Coinpanda is provided for informational purposes only. We do not guarantee that our understanding of the cryptocurrency tax rules detailed below is in fact correct, or up to date according to the latest regulations. This service is not intended to substitute for tax, audit, accounting, investment, financial, nor legal advice. Please see our full disclaimer.


1. Crypto taxation in Canada

The Canadian Senate reviewed the issue of taxation of cryptocurrency already in 2014 to address the growing popularity. The Canadian Revenue Agency (CRA) has published guidance to help Canadians understand the tax implications of cryptocurrencies better.

The CRA considers bitcoin and other cryptocurrencies to be a commodity with regards to taxation. In general, each disposal of a crypto is a taxable event:

  • Selling of cryptocurrency and you receive fiat currency (such as Canadian dollars)
  • If you trade or exchange cryptocurrency (includes also crypto-to-crypto transactions)
  • Gifting cryptocurrency to another person
  • Use cryptocurrency to pay for goods or services

It should be clear now that if you have bought and sold bitcoin (or another cryptocurrency), you probably have to report this in your annual tax return to the CRA.

Income from cryptocurrency transactions is either treated as business income or as capital gains. Business income is treated differently for tax purposes than capital gains.

The CRA lists some common signs that your activity may be classified as a business:

  • You carry on the activity for commercial reasons
  • You undertake activities like a business. This might include preparing a business plan and acquiring capital assets or inventory.
  • You promote a product or service
  • You have intentions to make a profit (even if you are unlikely to do so in the short term)

In most cases, a business activity needs to involve repetitive actions over time. If you are a day trader you will therefore most likely be considered to carry on a business.


2. How to calculate capital gains

A capital gain occurs when you sell a cryptocurrency for more than the original purchase price. On the other hand, if the sales price is lower than the purchase price, it is considered a capital loss. Only half of the capital gain is subject to tax in Canada, and you can also use any capital losses to offset your capital gains.

To calculate the capital gains you need to first establish the cost basis for the cryptocurrency you are disposing of. In Canada, you need to use Adjusted Cost Base (ACB) which is simply the average purchase cost of all coins you have in possession. The capital gain for each transaction is then determined as the ACB value subtracted from the selling price.

We will look closer at how to calculate the cost basis (ACB) together with some practical examples later in this guide.


3. Buying, Selling & Trading

Buying and selling cryptocurrency can have different tax implications in Canada. In this Section, we will break down the current tax rules more in-depth and also explain with practical examples.

Buying cryptocurrency (Ex: CAD → BTC)

This is not considered a taxable event. Note that it’s important to keep track of all your purchases and complete transaction history so that you can calculate your cost basis and deduct the costs when you later dispose of the assets.

Selling cryptocurrency (Ex: BTC → CAD)

Selling cryptocurrency such as bitcoin for fiat currency (e.g. CAD) is considered a taxable event in Canada which is similar to most other countries. If you have done so, you will need to work out the capital gains for each transaction.

The CRA states clearly that each individual cryptocurrency is a separate asset and should be valued separately.

EXAMPLE 1

– Selling cryptocurrency

Jacob bought 0.4 BTC for $2,000 in 2017. One year later he buys 0.2 BTC for $3,500. Now, Jacob owns a total of 0.6 BTC which he has paid a total of $5,500 for.

In January of 2020, Jacob decides to sell his entire investment. He sells 0.6 BTC and receives $7,000 in exchange. His transactions can be seen in the below table:

TypeDateAmountPriceCost BasisCapital Gains
Buy2017-06-080.4 BTC$2,000$2,000
Buy2018-04-170.2 BTC$3,500$3,500
Sell2020-01-280.6 BTC$7,000(?)(?)

To calculate his capital gains, Jacob needs to find the total cost basis for the 0.6 bitcoin he has sold. This is simply the total initial cost ($5,500) since he is now selling his entire investment. The total capital gain is then found as $7,000 – $5,500 = $1,500.

TypeDateAmountPriceCost BasisCapital Gains
Buy2017-06-080.4 BTC$2,000$2,000
Buy2018-04-170.2 BTC$3,500$3,500
Sell2020-01-280.6 BTC$7,000$5,500$1,500

Half of his capital gain is subject to tax (taxable capital gain = $750) which he needs to report on his tax return to the Canadian Revenue Agency.

Trading cryptocurrency (Ex: XRP → ETH)

Trading cryptocurrency for another cryptocurrency is no different than selling with regards to taxation. The CRA sees this as a barter transaction, and you have to determine the value in Canadian dollars at the time of the transaction.

Normally, the fair market value of the acquired cryptocurrency is used to determine the sales proceeds for each trade transaction.

Transactions with stablecoins (Ex: LTC → TUSD)

Stablecoins such as Tether (USDT), TrueUSD (TUSD) and Paxos (PAX) are treated similarly to any other cryptocurrency by the CRA. Because of this, all transactions with stablecoins are therefore taxed in a similar fashion to trade transactions like already explained.

EXAMPLE 2

– Trading cryptocurrency

Emma bought 20 litecoin in 2018 and paid $800. In 2019, she decides to exchange 5 of her litecoin for 3.5 ethereum. At the time of this transaction, 3.5 ethereum was valued at $500. Now, how can Emma calculate her capital gains?

We already know the value of her sales proceeds which is $500. The original acquisition price (cost basis) can be found as 5 / 20 * $800 = $200. Her capital gains are then found as $500 – $200 = $300. 50% of the gains ($150) are considered taxable capital gains which Emma needs to report on her tax return.


4. Margin & Futures Trading

It has become very popular to trade cryptocurrencies on margin the last few years, and many popular crypto exchanges offer this like BitMEX, FTX and Bybit for example. Instead of buying or selling cryptocurrency you actually own, margin trading lets you borrow funds from the exchange to speculate if the price will go up or down in the future. The former is often referred to as going long, while the latter is going short. Futures and derivates trading works in a similar fashion, ie. you borrow funds when you make a purchase or sell order.

When you trade futures on an exchange like BitMEX, you will open a position each time you make a buy or sell order. When the position is closed, you will have made either a gain or loss.

The Canadian Revenue Agency has not yet issued tax guidance for the treatment of margin/futures trading specifically, but the safe approach is to include the gains or losses in your total capital gains calculations. A crypto tax solution like Coinpanda calculates your capital gains for margin trading automatically so you don’t have to do this manually.


5. Taxable income from Mining & Staking

Mining of cryptocurrency

The bitcoin blockchain is secured by what we refer to as miners. By using specialized hardware to solve complex mathematical equations, miners make it possible for me and you to transfer bitcoin and trust that it will be sent to the rightful recipient without the use of third party service. To incentivize miners to do this (also called Proof-of-Work), they are rewarded with newly created bitcoins and also the fees paid for each transaction.

Cryptocurrency received as payment for mining is subject to tax treatment in almost all countries, with Canada being no exception. Again, the tax treatment depends on whether your mining activity is classified as a business or just a hobby. If you are mining crypto such as bitcoin or ethereum with the intention of making profits on a regular basis, you will most likely be considered conducting business activity and the crypto received will be taxed as business income.

You can normally deduct any directly associated costs like electricity and computer hardware from your mining income. You should also be aware that when you decide to sell the coins later, the sales proceeds will become part of your business income and taxed as such.

If your mining is just a personal hobby, you will only pay capital gains tax when you later sell (dispose of) the received coins. Because you didn’t pay anything for the coins originally, the cost basis should be considered as zero so that your capital gains are equal to the market value (in CAD) at the time when you sell the coins in the future.

The CRA says that it will be decided case by case if your activity is classified as a business or just a hobby.

Staking of cryptocurrency

The Canadian Revenue Agency has not released specific guidance for staking of cryptocurrency. Because staking is similar in nature to mining of cryptocurrencies, the safest approach is to treat received coins from staking in a similar fashion to mining.


6. Tax on Airdrops & Hard Forks

Tax on Airdrops

Airdrop of cryptocurrency tokens is often done as part of a marketing or advertising campaign. In some cases, you will need to register before a deadline to become eligible to receive tokens. You may also receive tokens just from holding another cryptocurrency in your wallet or on an exchange.

The CRA has not issued specific guidance to the tax treatment of cryptocurrency airdrops, but a safe approach is to pay capital gains tax when you later decide to sell the coins. Similar to crypto received from mining, you should assume a cost basis equal to zero because you did not pay anything to acquire the coins.

Tax on Hard Forks

Blockchains, e.g. the bitcoin blockchain, need to be updated from time to time. Such updates can result in a soft fork or hard fork. Updates that automatically get adopted by all participants is called a soft fork. This does not result in the creation of new tokens or a new blockchain. A hard fork, on the other hand, can result in a blockchain split where new tokens come into existence.

Bitcoin Cash is an example of a hard fork where all miners could not agree on whether to adopt the proposed change or not, and the bitcoin blockchain was split as a result. Everyone that owned bitcoin at the exact time when the split happened would then receive an equal number of Bitcoin Cash.

The Canadian Revenue Agency has not provided specific guidance for how cryptocurrency received from hard forks should be treated for tax purposes. Again, a safe approach is to pay capital gains tax when you later decide to sell the coins and assume a cost basis equal to zero similar to airdrops explained above.

In most cases, Coinpanda classifies airdrops and hard forks automatically when you import your transactions from a wallet or exchange. On the Tax page, you will see a total overview of your crypto received as income, airdrops, hard forks, etc.


7. Tax on ICOs & IEOs

ICOs (“Initial Coin Offerings”) and IEOs (“Initial Exchange Offerings”) are a popular form of raising capital by companies and projects launching their own blockchain or token. In both cases, a person typically invests in a token that will be released in the future and pays with another cryptocurrency like bitcoin or ethereum.

An IEO differs from an ICO by being held on an exchange, and the token is in most cases listed on the exchange shortly after the IEO has concluded.

The Canadian Revenue Agency has not provided specific guidance for the treatment of ICOs or IEOs, but since this is very similar to a crypto-to-crypto transaction, we can treat such transactions similarly for tax purposes. If you invest in token XYZ and pay with bitcoin, you will have to calculate capital gains on the bitcoin disposed of. You will need to use the fair market value of bitcoin on the date you made the investment which will also become the cost basis for the newly purchased tokens.


8. Cryptocurrency Gifts & Donations

The tax treatment of gifting and donating cryptocurrency is not mentioned in the cryptocurrency taxation guidelines from the CRA. If you have ever gifted crypto like bitcoin to another person, or made a donation to a charity, we recommend that you contact the CRA directly or speak to a professional tax consultant in Canada.


9. Cryptocurrency Loans

The CRA has not mentioned the tax treatment of crypto received as interest specifically. Again, a safe approach is to apply the same practice as used for cryptocurrency received from mining, staking, airdrops or hard forks. This means you will calculate capital gains only when you sell the coins in the future and assume an acquisition cost equal to zero.


10. Tax on income as Cryptocurrency

Today, some employers are paying salaries in cryptocurrency instead of fiat (like CAD) to their employees. The CRA states that crypto received as payment for salary or wages will be included in the employee’s normal income. This means you need to pay income tax according to subsection 5(1) of the Income Tax Act.

The same rules can be assumed to apply for both employees and freelancers. In both cases, the fair market value is determined on the date of receipt.


11. Superficial Loss Rule

To prevent investors from taking advantage of capital losses, the CRA has put a superficial loss rule in place. Section 54 of the Income Tax Act indicates that a superficial loss occurs from selling cryptocurrency when both of the following two conditions are met:

  1. During the period that begins 30 days before and ends 30 days after the disposition, the taxpayer or a person affiliated with the taxpayer acquires a property (in this definition referred to as the “substituted property”) that is, or is identical to, the particular property, and
  2. At the end of that period, the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the substituted property,

This might sound confusing, but simply put it means that a capital loss cannot be claimed if you buy the same cryptocurrency either 30 days prior to, or after, the disposition (when it was sold). Without this rule, a taxpayer could reduce his or her tax burden by selling a cryptocurrency, trigger a capital loss, then immediately buy it back shortly after.

It is important to mention that it is not illegal to buy back the crypto shortly after you have sold it. However, you need to make sure you are not claiming a capital loss for transactions where the superficial loss rule kicks in.

If you want to avoid the superficial loss rule altogether, you simply need to wait. You will need to wait at least 30 days before you sell a crypto after purchasing it, and also 30 days before you buy back the same crypto you have sold.

See this article for more information about the superficial loss rule and the potential consequences when calculating and reporting your capital gains to the CRA.


12. Foreign Property

If you during any time of the year hold specified foreign property valued greater than CAD 100,000, you are required to report this by filing a Foreign Income Verification Statement. This also applies to cryptocurrencies which means you need to file this form if the total value of your crypto assets exceeds the threshold during the tax year.


13. Minimize your Taxable Gains

There are several ways you can minimize your taxable gains and tax liability. In this Section, we will look at the three most commonly used methods that are allowed in Canada.

Deduct cryptocurrency losses

If you sell a cryptocurrency and receive less than the calculated acquisition cost using ACB, you will have realized a capital loss on the asset. Such losses can be used to offset your total capital gains for cryptocurrencies, or capital gains for other capital assets like shares or index funds.

It’s important to be aware that capital losses cannot always be claimed due to the superficial loss rule already discussed (Section 11). Also, you are allowed to deduct only 50% of the losses, similar to how you are paying capital gains tax on only 50% of your gains.

Trading fees

Most exchanges charge trading fees when you buy, sell or trade cryptocurrency. Trading fees are considered deductible costs that can be deducted from the sales proceeds amount.

If you have a large number of transactions, deducting the fee amount can make a significant impact on your total tax liability. Most crypto tax solutions like Coinpanda does this automatically for you.

Lost and stolen cryptocurrencies

It is not clear today how the CRA treats lost or stolen cryptocurrency. However, most countries allow the taxpayer to deduct the original cost from their capital gains if they have been a victim of fraudulent actions or permanently lost access to their private keys.

We recommend that you ask a certified tax professional in Canada if this applies to you.


14. How to file your tax reports

Filing and reporting cryptocurrency taxes can sound complicated and intimidating at first. The whole process can be summarized in the following 6 steps:

  1. Download the transaction history from all exchanges where you have bought or sold any cryptocurrency. To calculate your cost basis correctly, it is important to include the history for ALL previous years.
  2. Review your transaction data and make sure that the calculated balance matches your actual portfolio.
  3. Look up and assign market rates to all transactions which do not include Canadian dollars (Ex: ETH → LTC). This is required to calculate the cost basis correctly.
  4. Determine the cost basis value for each transaction according to the Adjusted Cost Base method (ACB). Remember the possible implications of the superficial loss rule.
  5. File your crypto taxes before the deadline. You can file your taxes either online or complete a paper tax return.

This can be a very tedious and complicated process for most people that have had more than a few transactions during the year. Most crypto investors prefer to use a cryptocurrency tax solution such as Coinpanda to help them with calculating and filing their annual tax report. Coinpanda simplifies this process by carrying out steps 1 to 4 automatically.


15. Record keeping of transactions

The CRA puts the responsibility of keeping records of all transactions on the taxpayer itself. Many cryptocurrency exchanges keep these records for a limited time only, so you should make it a habit to periodically export and save this information. You are required to keep records of all transactions and supporting documents for a minimum of six years following the last tax year they relate to.

As stated in the Guide for cryptocurrency users issued by the CRA, you should keep the following records on your transactions:

  • the date of the transactions
  • the receipts of purchase or transfer of cryptocurrency
  • the value of the cryptocurrency in Canadian dollars at the time of the transaction
  • the digital wallet records and cryptocurrency addresses
  • a description of the transaction
  • the exchange records
  • accounting and legal costs
  • the software costs related to managing your tax affairs

Coinpanda’s tax product can create a capital gains report with most of this information for you.

If you are a miner, also keep the following records:

  • receipts for the purchase of cryptocurrency mining hardware
  • receipts to support your expenses and other records associated with the mining operation (such as power costs, mining pool fees, and maintenance costs)
  • the mining pool details and records

16. Crypto tax deadline

The tax year in Canada is from January 1 – December 31. If you are completing your tax return for 2020 it needs to be filed by April 30 the year after, in this case, 2021.


17. How can Coinpanda help?

Coinpanda is a cryptocurrency tax solution built to simplify and automate the process of calculating and filing your crypto taxes. Coinpanda lets you do this in four simple steps:

  1. Import all your transactions using API keys or CSV files
  2. Verify that your data is matching (and make necessary adjustments if required)
  3. Coinpanda calculates your capital gains for each cryptocurrency
  4. Download a tax report that can be submitted to the CRA

Get started for free to find out more.


Do you have questions?

If you have additional questions related to bitcoin, cryptocurrencies and taxes, you can contact us directly from the Live Chat and we will be happy to help you!

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Guide to Cryptocurrency Taxation in the UK

TAX GUIDE

Cryptocurrency Taxation in the UK

Updated June 6, 2020

HMRC has published guidelines outlining the tax treatment of bitcoin and other crypto assets. In this guide you will learn everything you need to know about how to calculate your taxes, how to minimize your capital gains, and what is required to be reported by HMRC. You will also learn how to generate and file your crypto tax reports.

Coinpanda is provided for informational purposes only. We do not guarantee that our understanding of the cryptocurrency tax rules detailed below is in fact correct, or up to date according to latest regulations. This service is not intended to substitute for tax, audit, accounting, investment, financial, nor legal advice. Please see our full disclaimer.


1. HMRC crypto tax guidance

Her Majesty’s Revenue and Customs (HMRC) has published guidelines and several policy papers detailing how cryptocurrencies are taxed in the United Kingdom. In general, all individuals are taxed at the time when disposing of an asset. HMRC has defined ‘disposal’ in the policy paper Cryptoassets: tax for individuals as the following:

  • selling cryptoassets for money
  • exchanging cryptoassets for a different type of cryptoasset
  • using cryptoassets to pay for goods or services
  • giving away cryptoassets to another person

In most cases, you will be taxed according to Capital Gains treatment. In case you are considered to be an active or professional trader you will be subject to income tax treatment instead.

Your capital gains are in general calculated as the difference between the GBP value of the sales proceeds and acquisition cost of the disposed asset. We will go more into depth about capital gains together with practical examples in the next Sections.


2. Share pool accounting (cost basis)

HMRC has stated that the concept of pooling should be used to calculate the cost basis. This method allows for simpler capital gains tax calculations, and applies to shares of companies and also “any other assets where they are of a nature to be dealt in without identifying the particular assets disposed of or acquired”. HMRC says that cryptocurrencies fall within this description and should therefore be pooled.

In practical terms, this means that each cryptocurrency you have bought, traded or sold has its own pool and associated pooled allowable cost. The pool consists of the total number of coins you own, and the allowable cost is the total amount originally paid. Each time you buy or sell a cryptocurrency, the pool and associated cost will therefore change (Coinpanda updates the pool and associated cost automatically for each transaction for UK users).

If only some of the coins you own are sold, it will be considered a part-disposal. Capital gains are then calculated by considering a corresponding proportion of the total pooled allowable cost. This method is sometimes also referred to as Average Cost Basis.

EXAMPLE 1

– Share pool and total allowable cost

Henry bought 2 BTC for £6,000 in 2017. In 2018 he bought another 1.5 BTC for £9,000. By applying the concept of pooling as explained earlier, Henry has now a pool of 3.5 BTC and a total allowable cost equal to £15,000.

Later in 2020, Henry decides to cash in some profits and sell a part of his bitcoin investment. He sells 2.5 BTC for £21,000. His transactions can be seen in below table:

TypeDateAmountPriceCost BasisCapital Gains
Buy2017-06-082.0 BTC£6,000£6,000
Buy2018-04-171.5 BTC£9,000£9,000
Sell2020-05-182.5 BTC£21,000(?)(?)

To calculate his capital gains, Henry needs to find the less allowable cost (cost basis) for his disposal of 2.5 BTC: £15,000 * (2.5 / 3.5) = £10,714. The total capital gain is then found as £21,000 – £10,714 = £10,286.

TypeDateAmountPriceCost BasisCapital Gains
Buy2017-06-082.0 BTC£6,000£6,000
Buy2018-04-171.5 BTC£9,000£9,000
Sell2020-05-182.5 BTC£21,000£10,714£10,286

After the sale, Henry has 1 BTC left in his pool and a total allowable cost of £15,000 – £10,714 = £4,286.

Special rules to prevent wash sales apply to cryptocurrencies in a similar way to shares of companies. This is done by HMRC to prevent people from selling a crypto (or share) and buying it back shortly after with the intention of realizing losses and therefore reducing the total capital gains.

When you spend, sell or trade a cryptocurrency, you need to calculate the capital gains by disposing the coins in the following order:

  1. Same-day rule: coins bought on the same day as the sale (disposal)
  2. 30-day rule: coins acquired within 30 days of the sale (disposal)
  3. Total pool: all coins previously acquired

Buying a crypto asset on the same day

If you sell a cryptocurrency and buy the same coin on the same day, the acquisition cost will not be calculated from the main pool. Instead, the cost basis is calculated using the costs of the new tokens bought. This is done by considering all purchases on the same date – even if the acquisition has happened before you dispose of the asset.

If you have made multiple purchases at different prices on the same day, the cost basis is calculated by finding the average acquisition cost (see HMRC Capital Gains Manual).

Buying same crypto within 30 days

Similar to the same-day rule, the 30-day rule says that any cryptocurrency acquired within 30 days of the sale should be considered for calculating cost basis instead of the main pool. Rather than calculating the average acquisition cost as done for the same-day rule, FIFO logic should be applied for calculating cost basis for the 30-day rule.

If any of the special rules above apply, and the number of coins sold exceeds the number of new coins acquired, the total calculation will also include the acquisition cost from the total pooled allowable cost.

We will explain these rules better using a practical example:

EXAMPLE 2

– The 30-day rule explained

Sara invested in ethereum in August 2018 and has a total of 65 ETH in her wallet. She has spent a total of £4,500 acquiring them which is her pooled allowable cost.

Later she decides to sell some of her initial investment. On November 15th 2019 she sells 20 ETH for £2,900.

A few weeks later she decides to buy back some of the ethereum she sold. On December 3rd she buys 5 ETH for £500.

Because the newly acquired ETH were bought within 30 days of the disposal they will not be considered as part of the total pool. To calculate her capital gains from the sale of 20 ETH she needs to treat this as two separate disposals:

  • 5 ETH that was bought after the disposal
  • 15 ETH from the total pool

Her transaction history can be seen in below table:

TypeDateAmountPriceCost BasisCapital Gains
Buy2018-08-0165 ETH£4,500£4,500
Sell2019-11-1520 ETH£2,900(?)(?)
Buy 2019-12-035 ETH£500£500

The cost basis for the 5 ETH bought on December 3rd is considered in the calculations using the 30-day rule. For the remaining 15 ETH we find the cost basis from her pooled allowable cost.

Total cost basis will be £500 + £4,500 * 15 / 65 = £1,538. Her total capital gains are therefore found as £2,900 – £1,538 = £1,362

Sara still has 50 ETH in her pool which after the disposal has an allowable cost of £2,962.

TypeDateAmountPriceCost BasisCapital Gains
Buy2018-08-0165 ETH£4,500£4,500
Sell2019-11-1520 ETH£2,900£1,538£1,362
Buy 2019-12-035 ETH£500£500

3. Capital gains & allowances

In the UK, you only pay capital gains tax on your gains above the tax-free allowance (sometimes referred to as the Annual Exempt Amount). For the 2020/2021 tax year, the capital gains tax-free allowance is £12,300. This amount is applicable for capital gains across all capital assets.

Allowances for tax-free capital gains in the UK by year (source)

The amount of capital gains tax you will need to pay (if exceeding the tax-free allowance) depends on the total amount of your taxable income. For the 2020/2021 tax year capital gains tax rates for cryptocurrencies are:

  • 10% for your entire capital gain if your overall annual income is below £50,000
  • 20% for your entire capital gain if your overall annual income is above the £50,000 threshold

Be aware that even if your total capital gains do not exceed the tax-free allowance, you might still need to report your gains. If the total proceeds from the sale of cryptocurrencies in a given tax year exceed four times the Annual Exempt Amount (4 * £12,300 = £49,200) you are required to report the gains on your tax return.


4. Buying, Selling & Trading

In this Section we will look at different transaction types and the taxable implications.

Buying cryptocurrency (Ex: GBP → BTC)

This is not considered a taxable event. Note that it’s important to keep track of all your purchases and complete transaction history so that you can calculate your cost basis and deduct the costs when you later dispose of the assets.

Selling cryptocurrency (Ex: BTC → GBP)

Selling any type of cryptocurrency is considered a taxable event and you will need to calculate your capital gains for each transaction.

Trading cryptocurrency (Ex: ETH → LTC)

HMRC defines “exchanging cryptoassets for a different type of cryptoasset” a disposal. A crypto-to-crypto transaction (trading) is therefore considered a taxable event similar to selling cryptocurrency for fiat currency.

Normally, the market value of the acquired cryptocurrency is used to determine the sales proceeds for each trade transaction.

Selling cryptocurrency for stablecoins (Ex: BTC → USDT)

Stablecoins such as Tether (USDT), TrueUSD (TUSD) and Paxos (PAX) are treated similarly to any other cryptocurrency by the HMRC, hence all transactions with stablecoins are therefore considered a taxable event similar to crypto-to-crypto transactions.

EXAMPLE 3

Olivia exchanges 0.3 bitcoin for 15 litecoin. Her original cost of 0.3 bitcoin was £1,500. At the time of the exchange, 15 litecoin is valued at £2,300. This means that the sales proceeds for selling 0.3 bitcoin are £2,300 and the cost basis is £1,500. The resulting capital gains are calculated to be £2,300 – £1,500 = £800.


5. Margin & Futures Trading

HMRC has not released specific guidelines for the treatment of margin and futures trading of cryptocurrencies. This type of trading has become very popular the last few years, and if you have traded on exchanges like BitMEX or Bybit it means you have also bought or sold futures contracts.

If you are considered to be a financial trader by HMRC, you should report your gains as income on your tax return and pay income tax. If you are not considered to be a financial trader, HMRC is not clear whether your gains and losses are subject to capital gains tax or should be declared as income.

It is our interpretation that the safest approach is to report your gains and losses from margin trading as capital gains.


6. Taxable income from Mining & Staking

Any cryptocurrency received from mining activity, such as bitcoin or ethereum, shall be reported as income in your annual tax return. However, different tax rules apply if HMRC considers the activity to be classified as a business or just a hobby. This depends on several factors such as:

  • Degree and frequency of activity
  • Level of organization
  • Associated risks
  • Commerciality of the operation

If your mining activity is classified as a hobby, and not a business, you should declare the GBP value (at the time of receipt) of any crypto asset received as miscellaneous income on your tax return. You are allowed to include any appropriate expenses to reduce the net income amount. If you decide to keep the received coins in a wallet, they will be part of your pool and the GBP value will be included in the total allowable cost. If you decide to sell the coins in the future you may have to pay capital gains tax if the crypto have appreciated in value.

If HMRC deems the mining activity to be a business based on the criteria listed above, the mining income should be reported as trading profits and therefore subject to income tax. Similar to mining classified as a hobby, you can deduct appropriate expenses to reduce the net taxable amount.

When it comes to staking coins, HMRC has not released specific guidance for this. Because staking of cryptocurrencies is similar in nature to mining of cryptocurrencies, the safest approach is to treat received coins from staking in similar fashion to mining.


7. Tax on Airdrops & Hard Forks

HMRC has released clear guidance to the treatment of both cryptocurrency airdrops and hard forks. In this Section we will take a closer look at the tax treatment of such transactions.

Tax on Airdrops

You might have received an airdrop of unknown tokens in your exchange wallet (such as Binance) or ethereum wallet. In most cases, an airdrop of cryptocurrency tokens is part of a marketing or advertising campaign. Some airdrops require you to register before a deadline to become eligible to take part in the airdrop, but you may also receive tokens just from holding another asset in your wallet.

HMRC says that income tax may not apply if any of the following conditions apply:

  • You have received crypto without doing anything in return
  • The crypto received is not part of a trade or business involving mining

However, if you have received crypto in return for a service the coins will be subject to income tax and should be declared as miscellaneous income. If you are operating a business, they will be part of your trading profits.

If you decide to sell the coin at a later time, it will be subject to capital gains tax. We covered the treatment and calculation of capital gains tax in Section 2, 3 and 4.

Tax on Hard Forks

An update to the blockchain protocol can result in a soft fork or hard fork. A soft fork is an update that automatically gets adopted by all participants (miners, nodes etc). This does not result in the creation of new tokens or a new blockchain. A hard fork, on the other hand, can result in a blockchain split where new tokens come into existence.

If you owned tokens on the original blockchain before the hard fork (split), you will in most cases own an equal number of tokens on both blockchains after the event. An example of a blockchain split is Bitcoin Cash that was created in August 2017 when a group of miners decided to fork the bitcoin blockchain. If you held 1 bitcoin at the point of the hard fork, you would hold 1 bitcoin and 1 Bitcoin Cash after the event.

HMRC has provided guidance to the treatment of hard forks in their policy papers for tax on cryptoassets. After the fork, each crypto asset goes into their own pool. The total allowable cost associated with the original pool should be split between the two assets. The HMRC has not defined specific rules for how the cost should be split, but has stated that costs must be split on a just and reasonable basis under section 52(4) Taxation of Capital Gains Act 1992.

The most commonly used approach is that the cost of the original crypto is apportioned between the old and new asset based on the assets’ fair market value the day after the hard fork. You can also assign 100% of the cost to the original crypto, such that the new crypto will have a 0 cost associated with the new pool.

In most cases, Coinpanda classifies airdrops and hard forks automatically when you import your transactions from a wallet or exchange. On the Tax page, you will see a total overview of your crypto received as income, airdrops, hard forks etc.


8. Tax on ICOs & IEOs

ICOs (“Initial Coin Offerings”) and IEOs (“Initial Exchange Offerings”) are a popular form of raising capital by companies and projects launching their own blockchain or token. In both cases, a person typically invests in a token that will be released in the future and pays with another cryptocurrency like bitcoin or ethereum.

An IEO differs from an ICO that it is conducted by an exchange, and the token is in most cases listed on the exchange shortly after the IEO has concluded.

HMRC has not provided specific guidance for the treatment of ICOs or IEOs, but since this is very similar to a crypto-to-crypto transaction we can use the same taxation principle. If you invest in token XYZ and pay with bitcoin, you will have to calculate capital gains on the disposed bitcoin. You will need to use the fair market value of bitcoin on the date you made the investment which will also become the cost basis (or allowable cost) for the newly purchased tokens.


9. Cryptocurrency Gifts & Donations

Gifting and donating cryptocurrency is treated differently for tax purposes by HMRC.

Gifts

If you are gifting cryptocurrency to a person other than your spouse or civil partner, you are required to calculate and report your capital gains. In practical terms, the same principles for selling a crypto applies also for gifts. The capital gains are found by comparing the sales proceeds with your allowable costs. You can use the fair market value in GBP on the date that you made the transfer to calculate the sales proceeds.

Donations

You do not have to pay any capital gains tax on crypto assets donated to charity. However, there are two exceptions to this rule:

  • If you make a tainted donation. This refers to an arrangement to obtain certain financial advantages from a charity.
  • If the fair market value of the assets disposed of is higher than the acquisition cost found from your pooled allowable cost.

In either of the above cases, you might need to report and pay capital gains tax.


10. Cryptocurrency Loans

If you have received interest on your cryptocurrency you will need to treat this similar to cryptocurrency received from mining or staking. This means you should report the interest received as miscellaneous income on your tax return.


11. Tax on income as Cryptocurrency

Today, some employers are paying salaries in cryptocurrency instead of fiat (like GBP) to their employees. HMRC states that crypto received as employment income count as moneys worth. This means you need to pay income tax in addition to National Insurance contributions on the fair market value of the asset.

The same rules apply for both employees and freelancers. In both cases, the fair market value is determined on the date of receipt.


12. Minimize your Taxable Gains

There are several ways you can minimize your taxable gains. In this Section, we will look at the three most commonly used methods more in detail.

Offset capital gains

If you sell a cryptocurrency and receive less than the calculated cost basis, you will have realized a capital loss on the asset. Such losses can be used to offset your total capital gains, either in the same tax year, or in future tax years.

Losses must be claimed by including it on your tax return. HMRC says that you don’t necessarily need to report losses straight away, and you can actually claim losses up to 4 years after the end of the tax year that you sold the asset. This means that if you have unclaimed losses from 2018, you can use these losses to offset other capital gains for the tax year 2019/2020 or 2020/2021 for example.

Trading fees

In almost all cases, you will be paying trading fees when you are buying, selling or trading cryptocurrency. Trading fees are considered allowable costs that can be deducted from the sales proceeds amount.

Some exchanges charge quite high fees, and in some cases even above 2%. If you have a large number of transactions, deducting the fee amount can make a significant impact on your total tax liability. Most crypto tax solutions like Coinpanda does this automatically for you.

Low value and illiquid cryptocurrencies

A significant amount of cryptocurrencies have lost almost all their value since the all-time high (ATH) value. Chances are that you still own a token that is almost worthless today with very low liquidity on a few changes. Luckily, HMRC has issued guidance on how to make a negligible value claim on the disposal of such assets which can be used to reduce your total capital gains.

To do this, simply fill out the claim by entering information such as the name of the cryptocurrency and the value in which the asset should be treated as disposed of. If the crypto has practically no liquidity, you can normally consider the value to be £0.

Lost and stolen cryptocurrencies

In some cases, you can reduce the tax liability if you have lost access to your private keys or been a victim of fraudulent actions. See the next Section for more about this.


13. Lost & Stolen Crypto

Losing private keys

If you loose your private keys and cannot access the cryptocurrency anymore, the asset is still technically owned by you since it exists on the blockchain. Because of this, HMRC does not consider misplacing of private keys to be a disposal for capital gains tax.

If there is no possibility of recovering the private key and gaining access to the assets in the wallet, you have the option to make a negligible value claim as explained in Section 12. This means the loss can be crystallized to reduce your total capital gains.

Being defrauded

Unfortunately, there are many fraudalent actors with bad intentions in the cryptocurrency community. A lot of people have been scammed by such people, often by transferring bitcoin or ether to an address with the hope of getting more value back.

HMRC does not consider fraud or theft to be a disposal since you still have the right to recover them, and therefore also are the rightful owner of the assets. The implications of this are that you cannot claim a loss for capital gains purposes.

If you pay for a cryptocurrency and it turns out to be almost completely worthless, you can make a negligible value claim and reduce your capital gains if HMRC accepts the claim.


14. How to file your tax reports

Filing and reporting cryptocurrency taxes can sound complicated and intimidating at first. The whole process can be summarized in the following 6 steps:

  1. Download the transaction history from all exchanges where you have bought or sold any cryptocurrency. To calculate your cost basis correctly, it is important to include the history for ALL previous years.
  2. Review your transaction data and make sure that the calculated balance matches your actual portfolio.
  3. Look up and assign market rates to all transactions which do not include pound sterling (Ex: ETH → LTC). This is required to calculate the cost basis correctly.
  4. Determine the cost basis value for each transaction according to share pooling rules set by HMRC. Remember the possible implications of the same-day and 30-day rule.
  5. File your crypto taxes before the deadline. You can file your taxes either online or complete a paper tax return.

This can be a very tedious and complicated process for most people that have had more than a few transactions during the year. Most crypto investors and traders prefer to use a cryptocurrency tax solution such as Coinpanda to help them with calculating and filing their annual tax report. Coinpanda simplifies this process by carrying out steps 1 to 4 automatically.


15. Crypto tax deadline

The tax year in the UK is from April 6 – April 5 the following year. If you file your tax return electronically, the deadline is midnight on January 31 the following year. Paper returns are due by midnight on October 31.

If you are filing taxes for the 2019/2020 tax year (April 6, 2019 – April 5, 2020), the deadline is either October 31, 2020 (paper returns) or January 31, 2021 (electronic returns).

Your tax bill also needs to be paid by the deadline. If you file your tax return late, miss the deadline for payment, or file an incomplete tax return, you might have to pay a penalty as explained here.

Remember to keep records of all your transactions. Some crypto exchanges may only save your transaction history for a few months. HMRC says that it is the taxpayer’s responsibility for practicing record keeping, and should include the following details:

  • The type of cryptocurrency
  • Date of the transaction
  • If they were bought or sold
  • Number of coins/tokens
  • Value of the transaction in pound sterling
  • The cumulative total of the investment units held
  • Bank statements and wallet addresses (if needed for an review)

Coinpanda’s tax product can create a capital gains report with all of this information for you.


16. How can Coinpanda help?

Coinpanda is a cryptocurrency tax solution built to simplify and automate the process of calculating and filing your crypto taxes. Coinpanda lets you do this in four simple steps:

  1. Import all your transactions using API keys or CSV files
  2. Verify that your data is matching (and make necessary adjustments if required)
  3. Coinpanda calculates your capital gains for each cryptocurrency
  4. Download a tax report that can be submitted to HMRC

Coinpanda can calculate and generate tax reports compliant with HMRC tax guidelines as explained in this guide. Get started for free to find out more.


Do you have questions?

If you have additional questions related to bitcoin, cryptocurrencies and taxes, you can contact us directly from the Live Chat and we will be happy to help you!

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Guide: The Ultimate Cryptocurrency Tax Guide for US Citizens

TAX GUIDE

Guide: The Ultimate Cryptocurrency Tax Guide for US Citizens

Updated February 28, 2020

Cryptocurrency tax rules vary from country to country. In this guide, we will focus on the US and crypto tax rules for US citizens. You will learn how to calculate your taxes, how to minimize your capital gains, and what is required to be reported by the IRS. You will also learn how to generate and file your crypto tax reports.

Coinpanda is provided for informational purposes only. We do not guarantee that our understanding of the cryptocurrency tax rules detailed below is in fact correct, or up to date according to latest regulations. This service is not intended to substitute for tax, audit, accounting, investment, financial, nor legal advice. Please see our full disclaimer.


1. How are cryptocurrencies taxed in the US?

Do I need to pay taxes on cryptocurrencies such as bitcoin?

The Internal Revenue Services (IRS) released guidance for cryptocurrencies in 2014 and declared it to be taxed as property. This means that cryptocurrencies such as bitcoin and ethereum will be taxed with capital gains similar to other property transactions.

If you have bought a cryptocurrency and its value appreciates before you sell it later, the gain will be taxed. Similarly, if the crypto depreciates in value before you sell it, you may be able to reduce your taxes by deducting the losses against other capital gains. All capital gains from cryptocurrencies should be reported on Form 8949 as a minimum.

What transactions are considered taxable events?

Not all transaction types are considered taxable events. The following are examples of taxable events:

  • Selling cryptocurrency for US dollar
  • Selling cryptocurrency for other fiat currency (EUR, CAD, AUD etc.)
  • Buying cryptocurrency and paying with another cryptocurrency (trading)
  • Paying for a good or service with cryptocurrency
  • Receiving cryptocurrency from mining, airdrop or hard fork

These are however not considered taxable events: 

  • Buying cryptocurrency with US dollar
  • Buying cryptocurrency with other fiat currency (EUR, CAD, AUD etc.)
  • Transfer of cryptocurrency between two wallets/exchanges you own
  • Gifting cryptocurrency to another person (small amounts)
  • Receiving cryptocurrency as gift
  • Donating cryptocurrency to tax-exempt organizations

How do I calculate capital gains?

If you buy a cryptocurrency, and later sell the same cryptocurrency at a higher price (price has appreciated), the profits generated are treated as a capital gain. On the other side, if the cryptocurrency has depreciated in value before you sell it, you may be able to reduce your taxes by deducting the losses against other capital gains. You should always consult a tax professional before doing so to make sure you comply with all rules from the IRS.

Capital gains are generally calculated as the price of what you sold minus the purchase price (cost basis). There are several methods for calculating cost basis, and the IRS allows both FIFO (“First In First Out”) and LIFO (“Last In First Out”) to be used.

The most common cost basis method to use is FIFO which is also what we will consider in most of the following examples throughout this guide.

Short & Long term capital gains

The amount of time you have held a cryptocurrency before you sell it can influence how much tax you will pay. The following are general rules regarding hold time:

  • If you sell a cryptocurrency within one year of original purchase date, this will be considered short term capital gains tax. Such gains will be considered as normal income for tax purposes and are therefore also subject to your ordinary income tax rate.
  • If you sell a cryptocurrency after one year of original purchase date, this will be considered long term capital gains tax which can vary between 0% and 20% depending on your individual tax situation.

Since the long term capital gains tax will in most cases be lower than your short term capital gains tax, you should always consider the holding period of a cryptocurrency before you decide to sell to optimize your tax situation.

EXAMPLE 1

– Buying and selling cryptocurrency

David is a libertarian and came across bitcoin in early 2015. Finding the concept of a decentralized currency quite fascinating, David decides to buy 5 bitcoin at that time. Later in 2017, David noticed the hype and media coverage starting to rise and he decides to buy bitcoin again. In the beginning of 2018 he decides to sell most of his holdings. His transaction history can be seen in below table:

TypeDateAmountPriceCost BasisCapital Gains
Buy2015-07-065 BTC1,500 USD1,500 USD
Buy2017-04-172 BTC2,400 USD2,400 USD
Buy2017-09-243 BTC12,000 USD12,000 USD
Sell2018-02-018 BTC80,000 USD(?)(?)

David can calculate his capital gains using either FIFO or LIFO cost basis method. We will show how both methods can be used:

Method 1: FIFO

FIFO is an abbreviation for “First In First Out”, and as the name suggests we are selling the coins first bought (the oldest coins) using this method. His cost basis for selling 8 BTC is therefore found as 1,500 USD + 2,400 USD + (1/3) * 12,000 USD = 7,900 USD.

His capital gains using FIFO cost basis method will be: (selling price) – (cost basis) = 80,000 USD – 7,900 USD = 72,100 USD.

TypeDateAmountPriceCost BasisCapital Gains
Buy2015-07-065 BTC1,500 USD1,500 USD
Buy2017-04-172 BTC2,400 USD2,400 USD
Buy2017-09-243 BTC12,000 USD12,000 USD
Sell2018-02-018 BTC80,000 USD7,900 USD72,100 USD

Method 2: LIFO
LIFO is an abbreviation for “Last In First Out”, and using this method we are selling the coins bought last (the newest coins) which is the opposite of FIFO cost basis method. David’s cost basis for selling 8 BTC using LIFO is found as 12,000 USD + 2,400 USD + (3/5) * 1,500 USD = 15,300 USD.

His capital gains using LIFO cost basis method will be: (selling price) – (cost basis) = 80,000 USD – 15,300 USD = 64,700 USD.

TypeDateAmountPriceCost BasisCapital Gains
Buy2015-07-065 BTC1,500 USD1,500 USD
Buy2017-04-172 BTC2,400 USD2,400 USD
Buy2017-09-243 BTC12,000 USD12,000 USD
Sell2018-02-018 BTC80,000 USD15,300 USD64,700 USD

As we can see from these two examples, David would minimize his capital gains by using LIFO over FIFO cost basis method.


2. Taxes on Buying, Selling & Trading crypto

In this Section we will look at different transaction types and the taxable implications.

Buying cryptocurrency (Ex: USD → BTC)

This is not considered a taxable event. Note that it’s important you keep track of all your purchases and complete transaction history so that you can calculate your cost basis when you later sell the cryptocurrency you bought.

Selling cryptocurrency (Ex: BTC → EUR)

Selling any type of cryptocurrency is considered a taxable event and you will need to calculate your capital gain for each transaction.

Trading cryptocurrency (Ex: ETH → LTC)

A crypto-to-crypto transaction (trading) is considered a taxable event similar to selling cryptocurrency for fiat currency.

EXAMPLE 2

– Trading cryptocurrency (crypto-to-crypto)

Jake buys 2 bitcoin in April of 2017. Later that year, he sees the price of ethereum go up and trades half his bitcoin holdings for 15 ethereum. After the summer, Jake decides to buy 10 litecoin with 5 of his ethereum. His transaction history can be seen in below table:

TypeDateAmountPriceCost BasisCapital Gains
Buy2017-04-062 BTC4,200 USD4,200 USD
Sell2017-06-171 BTC3,500 USD(?)(?)
Buy2017-06-1715 ETH3,500 USD3,500 USD
Sell2017-09-055 ETH8,100 USD(?)(?)
Buy2017-09-0510 LTC8,100 USD8,100 USD

Notice that we have split each trade into two separate transactions. This is done to make it easier to calculate cost basis and resulting capital gains.

Jake can calculate his capital gains using either FIFO or LIFO cost basis method. In this example we will consider FIFO only:

Transaction 2: Selling 1 BTC

Cost basis is (1/2) * 4,200 USD = 2,100 USD. Notice that since Jake only have bought bitcoin one time in the past before selling 1 BTC, both FIFO and LIFO method would yield same cost basis. His capital gains will be: (selling price) – (cost basis) = 3,500 USD – 2,100 USD = 1,400 USD.

Transaction 4: Selling 5 ETH

Cost basis is (5/15) * 3,500 USD = 1,167 USD. His capital gains will be: (selling price) – (cost basis) = 8,100 USD – 1,167 USD = 6,933 USD.

TypeDateAmountPriceCost BasisCapital Gains
Buy2017-04-062 BTC4,200 USD4,200 USD
Sell2017-06-171 BTC3,500 USD2,100 USD1,400 USD
Buy2017-06-1715 ETH3,500 USD3,500 USD
Sell2017-09-055 ETH8,100 USD1,167 USD6,933 USD
Buy2017-09-0510 LTC8,100 USD8,100 USD

Selling cryptocurrency for stablecoins (Ex: BTC → USDT)

Stablecoins, even though they are often supposed to be pegged to the US dollar, are treated similar to any other cryptocurrency and such transactions will therefore also be considered a taxable event.

Paying for goods or services with cryptocurrency

Paying for a good or service with cryptocurrency is considered as selling your cryptocurrency, and will therefore also be considered as a taxable event.

This means that every time you buy something, for example a cup of coffee or flight tickets, and you pay with cryptocurrency, this is considered a taxable event.

EXAMPLE 3

– Buying coffee with bitcoin

Sara buys 1 bitcoin in early 2019 for 3,700 USD. One day she sees that her favorite coffee shop accepts payments with bitcoin. She decides to buy one coffee using her bitcoin mobile wallet and realizes only later that she might need to pay some tax since bitcoin has appreciated in value since her original purchase.

The fair market value of bitcon the day she pays for her coffee is 7,200 USD. The coffee costs 3.15 USD which equals 3.15 / 7,200 = 0.0004375 BTC. Her transactions can be summarized as the following:

TypeDateAmountPriceCost BasisCapital Gains
Buy2019-01-121 BTC3,700 USD3,700 USD
Sell2019-05-270.0004375 BTC3.15 USD(?)(?)

Cost basis is (0.0004375/1) * 3,700 USD = 1.61875‬ USD. Her capital gains will be: (selling price) – (cost basis) = 3.15 USD – 1.61875 USD = 1.53125 USD.

TypeDateAmountPriceCost BasisCapital Gains
Buy2019-01-121 BTC3,700 USD3,700 USD
Sell2019-05-270.0004375 BTC3.15 USD1.61875‬ USD1.53125 USD

Transfering cryptocurrency between two wallets/exchanges

Transfering cryptocurrency between two wallets or exchanges is not considered a taxable event. 


3. Tax on Margin Trading

Margin trading separates itself from normal spot trading by the fact that you don’t need to hold/own the asset or cryptocurrency you are selling when making a buy order. Margin trading is similar to trading futures/CFD contracts and there are no specific tax rules when it comes to such trading with cryptocurrencies. Opening a position in margin trading is similar to either buying or selling (going long or short) and paying with borrowed funds, and closing a position is when you pay back what you originally borrowed.

After closing a position you will either have a realized capital gain or loss, and should be declared in the same way as a regular trade. This means that with regards to tax purposes, margin trading is considered in the same way as regular trading (spot).

Margin Trading has become very popular the last year, and if you have traded on exchanges like BitMEX or Bybit you have also taken part in margin trading.


4. Tax on cryptocurrency Mining

Any cryptocurrency recevied from mining activity, such as bitcoin or ethereum, shall be reported as income in your annual tax return. However, different tax rules apply depending on if the activity is classified as a business or just a hobby. Each situation has to be investigated individually to determine this, but the following criteria are used in general:

  • Amount of profits generated from the mining activity
  • The miner’s previous history with regards to profit/loss from mining
  • The amount of time and resources invested into the activity
  • The expectation of future income from the activity

If your mining activity is classified as a hobby, and not a business, you will need to declare your mining income as additional income in your tax return. You will also be eligable to declare deductions for expenses directly related to your mining activity.

Businesses that conduct cryptocurrency mining need to report both income and expenses on Schedule C – Profit or Loss from Business. While hobby miners are not subject to 15.3% self-employment tax, businesses are. Businesses are also allowed to declare a wider range of deductions for expenses.


5. Tax on Airdrops & Hard Forks

Airdrops have been a popular marketing stunt performed by companies raising capital through either an ICO or IEO the last years. An airdrop is essentially free cryptocurrency, often given to people that either supports the company or project, or being rewarded for holding another cryptocurrency at a specific time.

In most cases, these airdrops will have very low value and thus the tax implications can be considered negligible. However, if you have received an airdrop of considerable value, the tax treatment is similar to income and should be reported as such on your tax return.

You might also have experienced receiving cryptocurrency from a hard fork in the past, such as the Bitcoin Cash hard fork that happened on 1st of August 2017. The IRS has so far not given any specific guidance on hard forks, but the general understanding is that hard forks should be considered equal to additional income on your tax return.

If you received the new coins as a result from the hard fork as soon as the blockchain went live, the value should be considered as 0. This means that you will not pay any capital gains before you sell such coins at a later time with cost basis equal to 0.


6. Tax on ICOs & IEOs

ICOs (“Initial Coin Offerings”) and IEOs (“Initial Exchange Offerings”) are a popular form of raising capital by companies and projects launching their own blockchain. The ICO mania phase peaked in late 2017 / early 2018, but even two years later, a considerable amount of money is still being raised through this funding mechanism.

An IEO differs from an ICO that it is conducted by an exchange, and the token is in most cases listed on the exchange immediately after the IEO has concluded.

With regards to tax purposes, investing in an ICO / IEO is a taxable event because you are selling a cryptocurrency for a token that will be issued at a later time.

It is worth noting that the date of transaction is not the date when you transferred your cryptocurrency or participated in the token sale, but rather the date when you received the tokens.


7. Tax on Staking Rewards

Cryptocurrency received from staking in a “Proof of Stake” network must also be reported to the IRS, and is in general treated similar to cryptocurrency received from mining (See Section 4). Activity from staking will be classified as either a hobby or business which could have an impact on the tax implications.


8. Tax on Gifts & Donations

Gifting or donating cryptocurrency is under most conditions not considered a taxable event and depends on the amount being gifted/donated.

Gifts

It is allowed to gift up to $15,000 without being considered a taxable event. For all gifts exceeding this value, Form 709 must be filled out by the giver as part of the annual tax return.

The $15,000 threshold applies to each person receiving the gift, hence you are allowed to gift this amount to as many people you wish, as long as no single person is gifted more than $15,000, to avoid tax obligations.

The person receiving the gift will also take on the cost basis of the cryptocurrency from the original owner.

Donations

If you have donated cryptocurrency to any tax-exempt qualified organization, you will be able to deduct the value at the time of the contribution in your tax return. How much you are allowed to deduct depends on how long you have held the asset donated:

  • For cryptocurrencies held more than 1 year, you are allowed to deduct up to 30% of your Annual Gross Income.
  • For cryptocurrencies held less than 1 year, you are allowed to deduct up to 50% of your Annual Gross Income.

All donations above $500 needs to be reported on Form 8283. Donations are also not subject to any capital gains tax.


9. Tax on Cryptocurrency Loans

Interest received from lending out your cryptocurrency is treated similar to cryptocurrency received from mining and staking, hence it is subject to income tax and you will also need to determine whether your activity is considered a hobby or business.


10. How to minimize your Taxable Gains

Have you invested in a cryptocurrency that has depreciated in value since you bought it? Or have you been hacked or for some other reason lost access to your crypto holdings? Continue to read to learn more about what actions you can take to potentially reduce your final tax obligation.

Losses and Trading Fees

As already mentioned in this guide, your capital losses from cryptocurrency trading is fully deductible against your capital gain profits. A lot of crypto investors have made large gains from some cryptocurrencies, while other investments might still be at a loss (unrealized losses). By selling the crypto holdings that are currently at a loss you are realizing your capital losses which can reduce your total tax obligation! You are also free to buy back the crypto asset right after selling it without being considered as wash trading which is the case for US securities.

Selling cryptocurrencies at a loss to reduce your total tax obligation is known as Tax Loss Harvesting and is fully compliant with the IRS since cryptocurrencies are still treated as property and not securities.

If you have been trading cryptocurrencies on different exchanges chances are that you have paid a significant amount of trading fees throughout the year. Trading fees are considered a cost for acquiring the crypto asset and are therefore fully deductible aginst your capital gains.

Hacked or Stolen cryptocurrency

As of the tax year 2017, losses due to theft or hacks are no longer deductible. Losses prior to 2017 are however still deductible if you can prove both the ownership at the time of incident, and how much was lost/stolen.

Mining Expenses

For people mining cryptocurrencies and where the activity is considered a hobby (not a business), the IRS has stated that it is allowed to make deductions for “typical hobby-related expenses”. In the case of mining, this would typically be:

  • Electricity (only electricity used by your mining hardware)
  • Expenses for mining hardware
  • Fees related to accounting/bookeeping
  • Internet service

If the mining activity is considered a business, other rules apply for what expenses can be deducted. Such deductions must be reported on the Schedule C – Profit or Loss from Business form and gives in general freedom to make even more deductions compared to mining considered as a hobby.


11. How to file your Crypto Tax Reports

How to generate and file your crypto tax report can be summarized in 6 steps:

  1. Download the transaction history from all exchanges where you have bought or sold any cryptocurrency. To calculate your cost basis correctly it is important to include the history for ALL previous years.
  2. Review your transaction data and make sure that you have enough in your balance to realize all your sells.
  3. Determine the cost basis value for each transaction which later will be used to calculate your capital gains and losses.
  4. Calculate your capital gains using either FIFO or LIFO cost basis method
  5. File your capital gains (Form 8949 and Schedule D)
  6. Declare any income (mining, staking, airdrops etc.) under “Other Income” section of Schedule 1 – Additional Income and Adjustments to Income

This can be a very tedious and complicated process for most people that have had more than a few transactions during the year. Most crypto investors and traders prefer to use a cryptocurrency tax calculator such as Coinpanda to help them with calculating and filing their annual tax report. Coinpanda simplifies this process by carrying out step 1 to 4 automatically.

Save your transaction history

It is important to maintain good practice for bookeeping and to save all your transaction history in a safe place that can be accessed later in case you get audited by the IRS.

Deadline for filing cryptocurrency tax report

The deadline for filing and submitting all your tax reports to the IRS is the 15th of April each year.

It is possible to apply for an extension if you need more time.


12. How can Coinpanda help?

Coinpanda is a cryptocurrency tax calculator built to simplify and automate the process of calculating your taxes and filing your tax report. Coinpanda lets you do this in four simple steps:

  1. Import all your transactions via API or CSV files
  2. Verify that your data is matching (and make necessary adjustments if required)
  3. Coinpanda calculates your capital gains for each cryptocurrency
  4. Download your Form 8949 ready to be filed

Coinpanda allows you to also track your cryptocurrency portfolio for free! You can track your portfolio value from day to day on your personal Dashboard page, and also get information about your unrealized gains or losses. Learn more.


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