In the eyes of the revenue service, crypto taxation is just another number on the list. And as a trader or investor, it’s an obligation you have to fulfill.
Thing is, crypto taxation is a complex topic for both tax authorities and traders. And there aren’t many crypto tax reporting tips out there to help the ordinary trader.
While nations such as the US, UK, and Australia among others have some clear rules on crypto taxes, others are still not sure where to start.
The issue is, just because your tax law hasn’t explicitly mentioned crypto doesn’t mean you won’t pay taxes. You’re to pay tax so far as you earn income from your activities. Failure to do so comes with penalties.
Luckily, this guide will help you get started. We’ll discuss issues that come with nonpayment of tax and the measures to take to be on a safer side.
But, before we talk about the penalties and the necessary steps, let us look at how some countries treat crypto when it comes to taxation in the table below.
Some countries treat crypto taxation as part of normal business and income operations. In these countries, all you have to do is to pay your tax on any income or business engagement – and the emphasis is not on whether it’s crypto-related or not. What’s important here is that it should be a taxable event.
But in the UK or US, and other places, crypto activities have clear-cut rules. These countries have been able to classify crypto as assets or currencies as we’ve illustrated in the table above.
Wherever you find yourself, it’s good to know your country’s stance on crypto taxation and how you can fulfill your obligation.
But what are the penalties you’ll face if you don’t pay tax? The short answer is, there may or may not be a punishment. The long answer is; it depends on which country you’re trading from.
What are the penalties for not paying your crypto tax?
Truth is, authorities rely on the information provided by the trader since it’s difficult to trace individual activities on crypto exchanges. This makes tax evasion easy – but may lead you into a bigger problem when caught.
But you have to understand that since most of these countries treat crypto trading and investment as some form of business or income, you’ll have to pay normal taxes as you would for any other business or income activity. Failure to do so may cause legal issues and you would be treated just like any tax evader.
Consequently, the punishment you get for evading crypto taxes differs from country to country. We’ll look at the countries where cryptocurrencies are closely monitored and what you may encounter for evading taxes.
Crypto tax reporting in the United States and the penalties
In the United States, the IRS sent out letters to more than 10,000 crypto traders and investors to let them know that their crypto activities are liable to property taxes just as any property tax. The IRS is also working to ensure that all virtual currency activities are taxed accordingly.
Also, the IRS gave a John Doe summons to Coinbase in 2018. The request was for Coinbase to submit customers’ account records from 2013 to 2015. In simple terms, a John Doe summon is a legal request issued to a person whose name is unknown at the time of issuing. It’s a vital tool in tax law to summon an unknown person.
This trigger was that out of about six million users on Coinbase, only 800 to 900 reported their crypto taxes.
In the US and Canada, failure to pay tax could lead to a $250,000 fine or five years in jail depending on the jurisdiction.
The UK’s tax agency HMRC was also looking for crypto traders who refused to report their taxes between 2017 and 2019. Refusal to pay your tax as a crypto trader in the UK could lead to a 200% fine on any amount due.
Crypto tax reporting in India and the penalties
India doesn’t have clear-cut laws about cryptocurrencies. However, the law makes it clear that any income should be taxable, regardless of whether the activity is related to crypto or not.
Government authorities have been reportedly sending messages to crypto traders asking them questions about their trades. If you’re a trader in India, any gains on trading activities would attract an income tax. Crypto mining income will also attract a business tax.
These are not laws set specifically for crypto activities, but are binding on income-generating activities. The government’s message also clearified that willful omission of your crypto earnings from your tax fillings will attract a penalty of Rs. 10,000 according to section 272A of the Income Tax Act, 1961.
Practical tips on crypto tax reporting – and how to avoid penalties
For traditional investors, tax laws are clear and traders are given a tax form to track their activities and calculate their taxable income.
This isn’t the case in the cryptosphere. Since many governments haven’t had laws about cryptocurrencies, traders and miners have to do their own tax reporting. This means, you have to determine the tax bracket your crypto activities belong to and report accordingly.
This makes it difficult to grasp as a trader. Thankfully, there are crypto taxation tools to help you track and calculate your taxable income. Here’s how to go about meeting your tax obligations so that you don’t get fined for nonpayment.
1.Know what is taxable and what isn’t
The fact that cryptocurrencies are taxable in your country doesn’t mean you have to pay taxes on every single crypto activity you engage in. Not every crypto activity is taxed, and as a trader, it would do you good to know the differences.
These are crypto activities that are taxable generally, no matter your jurisdiction.
- When you use your cryptocurrency to buy goods or services
- Receiving cryptocurrency as earnings or income. This could be income from crypto mining or from payment for services you have rendered to a third party.
- Selling cryptocurrency for fiat
- When you exchange your cryptocurrency for another cryptocurrency
Crypto activities exempted from tax
If you engage in any of these activities, you’re not supposed to pay tax.
- Moving crypto assets from one exchange to another from between crypto wallets
- Giving cryptocurrency as a gift to a family or friend
- When you buy cryptocurrencies with fiat
- When you donate your crypto assets to a societal course or to a charity organization that is exempted from taxes.
2.Know the source of your crypto income
An important exercise to take as a trader or miner is to know where your income comes from. You can get your crypto income from selling assets, buying or mining. Knowing your income sources helps you determine the type of tax you’re supposed to pay – income or capital gains tax.
This helps in calculating taxable income on your crypto activities. It also makes filling easier for you and your country’s tax authorities.
3.Track all your crypto engagements
As a trader or investor, you have to keep track of all your crypto purchases, sales, and mining income. In tracking, you should record information such as when you bought a coin, when you sold, and the amount of profit or loss you made.
This makes tax calculation easy when it’s tax season. Another reason why it’s good to track your transaction is that it saves you from paying higher taxes.
For example, if you buy a crypto asset at $20 and later sell it for $35, the tax will be calculated on the $15 increase. But if you fail to keep records, in which case, you wouldn’t have any data to prove that you bought it $20, the tax would be calculated on the amount you sold it, which is $35. This is usually the case with taxes in the US, but could differ in certain jurisdictions.
4.Use the right software for your crypto tax reporting
For many of us in the crypto trading game, it’s completely out of place to think of calculating our taxable income individually. There are many assets to monitor and a lot of metrics to track.
Many crypto assets are added to exchanges and the market moves so fast that it becomes impossible for you to follow all the drama every day. Thus, calculating taxes is out of your league.
That’s why there are a lot of crypto tax software to help you track your trades, calculate your gains and losses, and help you report your taxable income. The goal is to simplify the entire process of tracking, calculating, and reporting – an area BearTax has the best solutions. With BearTax, you get a comprehensive tool that keeps records and helps you calculate your taxable income while you focus on trading and investing.
5.Know more about the tax laws in your jurisdiction
While some countries may come with tax laws that deal with only crypto, most of the current legal systems rely on general income and capital tax laws. Your ability to report your crypto taxable income would depend on your knowledge of your country’s tax system and how it’s calculated.
Also, cryptocurrencies are always evolving. This means the tax laws concerning them will also keep evolving. As a trader, you need to learn along as you trade to avoid future tax penalties.
While crypto tools like BearTax will help you meet your country’s tax laws when calculating taxes, it is not a replacement to your country’s tax laws. Thus, you should always be on the lookout for changes in your country’s tax laws that might affect crypto.
What next for crypto tax reporting & penalties?
Paying your crypto tax should be a priority. Your country may not have a specific law binding crypto as an asset or currency, but if it falls within any income bracket, you’re encouraged to report your taxable income when tax season arrives.
Also, each country has its own tax laws. While there are many tools out there to help you with your crypto tax reporting, including monitor, calculate, and file your taxes, it’s still beneficial to know more about your country’s tax system. The software also helps you stay clean when trading because the chaos of the crypto market can be overwhelming.