Paying Crypto Taxes
I Don't Want To; But I Do It Anyway
3 Things are Certain in Life. Death; Taxes; and 21 Million Bitcoin.
A situation I never want to find myself in, is going to jail for owning crypto. Thankfully I live in Canada, so hopefully the only way the government would do that to me, is if I failed to pay my taxes. This is why paying my crypto taxes has always been important for me to get right. After spending countless hours reading about tax policy online, studying blockchains, and finding the best collection of portfolio management tools, I finally think I have it right!
When to Pay Taxes on Crypto
What sort of transactions actually constitute a “taxable event”? The answer to this question varies based on where you are in the world, but luckily there are some general rules that the majority of developed nations follow.
A taxable event is any event or occurrence that results in a tax liability.
Income
Any income you may receive from cryptocurrency is technically taxable. In Canada, I am subject to pay income tax on all the passive income streams I’ve set up within my portfolio. This includes interest earned within DeFi, or on an Exchange. For example, I am loaning Bitcoin out on Crypto.com and I have to report on the interest I earn. Every Satoshi I earn needs to be timestamped, and recorded. If I sell those sats, I am liable to pay a capital gain or report a capital loss on that amount.
Disposal of Assets
This is where things get tricky. Technically speaking, every trade, and transfer within the world of crypto that requires a fee to be paid, is a disposal of an asset, and thus taxable. It doesn’t matter if you are sending Bitcoin between two wallets that you own. When you send Bitcoin, you pay a transaction fee. That transaction fee, is you disposing of an amount of Bitcoin. That is taxable.
Fees are Expenses
I claim blockchain transaction fees, and exchange withdrawal fees as expenses. I claim them as such because that is what they are.
Fees Trigger a Capital Gains/Loss Calculation
Paying transaction fees to the Bitcoin network, is you disposing of an amount of Bitcoin at a 100% loss. This 100% loss on transaction fees can be used to reduce your tax liability. Any disposal whatsoever will go on to update your taxes owed. Track your fees.
Example: If I pay .0005 BTC as a fee (1 BTC = $50,000), then I can claim a $25 loss on that transaction.
Capital Gains Tax
If you’re in Singapore. Stop reading. There is no capital gains tax in Singapore.1
If you’re in Germany, just HODL your assets for more than 1 year, and you won’t need to pay capital gains tax on them.2
If you’re anywhere else in the world, then you better have a good handle on your assets. Recording your transactions is essential for being able to properly calculate your tax liability. In Canada, we must calculate our capital gains using the Average Cost Basis3 method. The method that your local tax agency requires you to use can vary. It’s best to check in with your tax agency and find out exactly what method to use. Depending on which one you choose, you can end up saving money on taxes as different methods will manifest different tax liabilities.
Never Sell; Never Pay Capital Gains.
The only kind of transaction that is not taxable, is the purchase of cryptocurrencies (with FIAT). Therefore, if you never sell your assets, you never need to pay capital gains taxes on them. Problem solved.
But what good is money (cryptocurrency) that you can’t spend? The answer might actually surprise you. Cryptocurrencies are actually extremely versatile financial instruments. You might be thinking I was starting this section off with satire, but that is not the case. I personally have chosen to adopt this strategy of never selling Bitcoin. I’ve done this because it keeps my taxes simple, and my tax liability low.
Bitcoin (and other crypto) is Collateral
Bitcoin can be used to obtain a stablecoin (USDT, DAI, USDC) loan, which you can then spend wherever you like. Technically, stablecoins are also cryptocurrencies, and are subject to the same set of rules that we outlined above. The benefit of using stablecoins is that they don’t generate significant tax liabilities. Most stablecoins are pegged to the USD, however there exist stablecoins for the EUR, CAD, CNY, and a variety of others.
The point of using your Bitcoin as collateral is so that you avoid selling it for cash.
Remember, selling Bitcoin is a taxable event that you’re likely to pay hefty capital gains on.
If you need cash to live, you can take out a loan against it, keep the Bitcoin, and obtain cash instantly. This is the secret behind the strategy of never selling Bitcoin. You can eat your cake, and have it too.
In this sense, you can completely avoid ever paying capital gains tax on your hard earned Bitcoin. In an ideal scenario, Bitcoin continues to rise to untold levels. This allows you to take out higher and higher amounts of cash against your Bitcoin. As long as you have the cashflow available to service your debt, you do not need to ever sell your Bitcoin.
You Still Need to Calculate Your Tax Owed
This strategy is all well and good, but regardless of whether or not you decide to employ the strategy of never selling bitcoin, you will still face tax obligations even if you only ever deal with stablecoins.
Manual Calculation
If you intend on calculating your tax obligation manually, then you will need to record 5 pieces of information for each and every transaction you do.
Date and Time of the Transaction
Type of Transaction (Trade, Transfer, Income)
Value of the Transaction at the Time it Occurred in your Local Currency
The Asset that was Transacted with (2 Assets for Trades)
Any Fees Paid on the Transaction
This is how I started out, but after a while, my cryptocurrency activity became quite complex, and this method became unfeasible.
Automatic Calculation
If you’re like me, then you have thousands of transactions, each of them are taxable events. I decided to use Koinly to help me automate the paying of my crypto taxes.
Koinly integrates with basically every exchange in the world. They listen for transactions that take place on those exchanges, and automatically updates your tax liability. Furthermore, Koinly integrates with the world’s most popular blockchains (Bitcoin, Ethereum, EOS, TRON, etc). It can listen to Bitcoin Addresses, Ethereum Wallets, etc and pick up on transactions that have taken place within them. It automatically adjusts your tax liability without you having to record anything. Koinly will use the capital gains formula that applies to you, wherever you may be in the world. I saved dozens of hours by using Koinly last year. I only wish I had started using it sooner.
Tax Season
As the tax season is soon approaching, my clients and family friends are stating to ask me about if and how they need to file for their crypto taxes. If you have complex transactions and need assistance with filing for your crypto taxes, get in touch with me.
All the Best,
Keegan Francis