Cryptocurrency is a rapidly growing and increasingly popular form of currency. While there is no one-size-fits-all approach to taxation when it comes to cryptocurrency, following some simple tips can help minimize your tax liability. In this blog post, we will discuss the basics of taxation with respect to cryptocurrency, and provide practical tips on how to minimize your tax exposure.
As you may know, cryptocurrencies are digital or virtual tokens that use cryptography for security. They are decentralized, meaning they are not subject to government or financial institution control. This makes cryptocurrencies an interesting investment choice – but it also makes them complicated for taxpayers to understand. Each country has their own sets of rules for crypto taxes. For example, crypto tax in Australia is different from other countries.
If you have invested in cryptocurrencies, be sure to consult a qualified estate planner or accountant who can help you structure and execute a tax plan tailored specifically for your situation. There is no one right way to go about minimizing your tax liability with regard to cryptocurrency; rather, it depends on the specific facts and circumstances of your case.
1. Understand what you are exposed to
Cryptocurrencies are complex and there are a lot of hidden risks. In this installment of our series on Crypto Tax Tips, we will discuss how to minimize your tax liability by understanding what you are exposed to.
It is important to remember that cryptocurrencies are not legal tender and as such, you may be liable for tax on them. Cryptocurrencies are subject to capital gains tax, income tax, and GST/HST.
1) Capital Gains Tax: When you sell or trade cryptocurrencies, any profits (including unrealized gains) should be reported on your taxes in the same way as any other form of taxable income . This includes reporting any gain when an asset is sold at a higher price than what was paid for it , even if no money changed hands. You do not have to pay estimated Canadian resident taxes nor withholding taxes on these amounts .
2) Income Tax: If you earn cryptocurrency as salary or wages , report all related earnings including capital gains and losses directly onto your federal income-tax return each year like regular income . Note that payments made in bitcoin / altcoins might still be considered bartering services which would result in bonus depreciation allowances being applied so keep track of your expenses accordingly!
3) GST/HST: Withdrawals from digital assets such as bitcoins or altcoins may also constitute “sales” for purposes of the Goods & Services Tax / HST., meaning that GST/HST may apply (at current rates )
2. Minimize your tax liability
It’s no secret that the taxation of cryptocurrencies is still in its infancy. This means that there are a number of gray areas when it comes to tax liabilities. Here are some tips on how you can minimize your tax liability:
1. Understand your taxable income.
Your taxable income is the total value of all the money you earn throughout the year, minus any allowable deductions. Keep track of this figure each month and make sure that it matches what you reported to your employer or financial institution during your tax filing process
2. Make use of business expenses.
You may be able to reduce the amount of taxes you pay by using business expenses as a way to offset your taxable income . For example, if you rent office space from an unrelated party, deducting this expense from your taxable income could lower your overall tax bill considerably
3. Invest in assets that are exempt from taxation.
Many assets – such as stocks and bonds –are exempt from capital gains taxes and other types of taxes depending on their classification (for example, long-term capital gains). By investing in these types of assets early on, you can cut down on future tax payments
3. Resourceful planning
Cryptocurrency usage is taxable, and like any other form of income, you must report it on your tax returns. In order to minimize your tax liability, be sure to keep accurate records of all cryptocurrency transactions and pay attention to property values as a result of crypto usage.
Cryptocurrencies are treated like regular currency for taxation purposes. This means that when you earn or spend cryptocurrencies, the value of that transaction is reported on your taxes just as if you earned money from working at a job or buying groceries with cash. The IRS treats cryptocurrency as ordinary income even if you don’t have any tangible assets associated with the coins
For example, if I purchase 1 bitcoin for $1050 USD today and sell it two months later for $1100 USD – my gain would be 1050 (the current price), minus relevant expenses such as fees incurred during the sale (in this case about 20%). That leaves me with an after-tax profit of 700 USD ($1100-$1050=$700). My capital gains are therefore taxed at 0% because they fall below the threshold at which long-term capital gains begin to accrue (+0%. If I had held onto the bitcoin instead of selling it, I would have been subject to 15% federal estate tax plus possible state taxes).
Likewise, if someone gives you bitcoins in exchange for goods or services – say they set up a mining rig worth 1000 BTC – those 1000 BTC become yours immediately no matter what happens to the price of the BTC.
Hopefully this has given you a better understanding of how to minimize your tax liability when it comes to crypto assets. While there is no guaranteed strategy that will work for everyone, following the advice in this post should help you get as much value as possible from your investment. Remember to do your research on different countries’ tax reports and consult with an accountant if you have any questions or concerns about your specific situation.