It’s tax time, my least favourite time of the year. Not because I don’t like paying taxes, but because my taxes are exceptionally complicated given the volume of cryptocurrency related transaction I need to account for.
If all you did was buy cryptocurrency in 2021, then you can actually stop reading now. You have no tax implications.
But, if you sold, staked, yield farmed, earned interest on, or were airdropped any assets, then you should pay attention.
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Disclaimer: I am not an accountant, nor a financial advisor. I am however, experienced, and well versed in the nature of cryptocurrency transactions.
I’ve been organizing and reporting my crypto transactions to my tax authority since 2015 which makes me more qualified to talk about how to report crypto transactions than most people.
Nonetheless, double check what I’m saying with your accountant to make sure you are reporting your transactions correctly. I shall not be held responsible for any information in this newsletter that I get wrong, now or in the future.
My tax authority is the Canadian Revenue Agency (CRA), so if you’re reading from another country, the way to report taxes is likely different.
I will attempt to make this letter as general as possible.
What Transaction do I need to track?
Simply buying cryptocurrency with fiat currency doesn’t actually trigger any taxable events. One more reason to keep your cryptocurrency strategy simple and just buy and hold.
If you’re like me, then you like playing around with you money, and making it work for you in passive income streams.
Here are the general classifications for transaction types.
Selling Cryptocurrency:
Triggers a Capital Gains Calculation. In Canada I need to update my Average Cost Basis (ACB) every time I sell a cryptocurrency.
What to Record:
Date & time of the transaction
The asset and amount you sold
The asset and amount you bought
The fee that you paid for the transaction
How to process the transaction:
If you record all of this information then you have everything you need to update your ACB. Stick this information in a spreadsheet and any accountant will know how to calculate the average cost basis of your transactions.
After the ACB is calculated, you will have the information you need to determine whether or not each transaction resulted in a capital gain (or loss).
One of the reasons you want to keep track of all this information, is that in the event that a transaction results in a capital loss, you can reduce the overall amount of taxes you pay.
For example, my $10k loss in 2021 can be used to reduce the amount of taxes I pay.
Note: In some places such as Germany and Portugal, if you hold the cryptocurrency for more than 365 days, you don’t have to pay capital gains on the asset.
Interest Payment / Staking:
Income. In Canada, any “interest” or “rewards” received from staking, lending, yield farming, or airdrops is treated as income.
What to Record:
The asset received
The amount received
The date & time of receiving it
How to process this transaction:
You have to convert the amount of interest you received into whatever is the equivalent amount of Canadian dollars at the time you received the asset. Then you add that amount of Canadian dollars to your income.
Note: Any rewards gained from yield farming is also treated as income. However, since the rewards accumulate outside of your account and only become “yours” when you “claim” them, you only need to keep track of the transaction that adds the assets to your account.
How to Deal with a Large Number of Transactions
Use Koinly, a service that automates the processing and calculation of your ACB, income, and capital gains.
Koinly will then deliver you a report that you can simply pass to your accountant to file your tax return. Here are the tips and tricks I’ve learned while using Koinly.
Past Articles on Taxes (For Private Subscribers)
I’m currently halfway through doing my taxes on Koinly.
If I stopped now, and reported the number Koinly is telling me, I would have a massive tax bill, and I would be overpaying.
This is because there are tricky nuances to how Koinly recognizes buying/selling transactions, as well as doing your crypto taxes more generally.
Here are 5 tips you can use to make your crypto taxes easier.
1. Keep track of all your purchases with fiat
Transactions wherein you buy cryptocurrency with fiat aren’t themselves taxable. However, they are required for calculating your average cost basis, and thus your capital gains.
I’m experiencing a problem right now wherein I haven’t recorded all of my purchases of bitcoin. So it looks like I’ve gotten a lot of bitcoin for free.
This lowers my average cost basis and makes every transaction look like a gain.
If I want to pay less capital gains, I need to raise my average cost basis.
2. Keep track of all transactions from the beginning of time
In order to calculate an accurate average cost basis and pay the right amount of capital gains tax, you need to give Koinly (or your accountant) all of your cryptocurrency transactions from your first transaction onwards.
So don’t delete any records from your previous tax years, as they will be required for future years.
3. Keep track of all addresses/wallets you’ve ever used
This comes back to having an accurate average cost basis.
If Koinly finds that you’ve sold Bitcoin, but has no record of you purchasing it, then it will assume an average cost basis of $0.
In other words, if you sell 1 BTC for $50k, and you have no record that you purchased it for $40k, then Koinly will assume you had a $50k capital gain.
If you give Koinly the purchase record, then you will have a capital gain of $10k. A big difference.
4. Double Check Koinly’s Work
Koinly makes mistakes. It doesn’t have the same context into when/where/why you made your transactions. So it will make mistakes in categorizing them.
Koinly is designed to make sure you pay the “safest” amount of tax. That is, when using Koinly out-of-the-box, you’re almost always going to overpay the government.
However, thats better than underpaying them, and finding out 5 years later that you owe them a ton of interest.
If you’re like me, and you have more than 10k transactions in 2021, then double checking Koinly and recategorizing the transactions can save you a ton of money.
5. Start Now
If you have more than 100 transactions, and you were lending, farming, airdropping, and trading, don’t wait until 1 week before the tax filing deadline.
Exporting transactions, and tweaking your transactions so Koinly categorizes them correctly is not a 30 minute job.
Do you need help?
Every year I put out an offer to help people figure out their crypto taxes. If you are inundated and overwhelmed with the state of your cryptocurrency wallets and transactions then this is something I can help with.
Don’t hesitate to reach out for support. If I cannot point you in the right direction, then we can get on a call to dig in deeper.
Regardless, I am here to help.
Cheers,
Keegan
Resources
Cryptocurrency Memes / Podcasts / Charts - v5HP7yBZAzuGVVJ&