Why Investors Need To Learn The Rules For Paying Taxes On Cryptocurrency And Nfts
by Arnab Dey Finance 21 April 2023
Whether you’re an investor in cryptocurrency, a collector or creator of NFTs, or you’re interested in the technological possibilities of blockchain and crypto, you need to learn the rules for paying taxes on cryptocurrency and NFTs.
Regulations around crypto have evolved, and tax collection agencies treat this new technology the same way it treats many investment assets.
Whatever your reason for getting into crypto, you need to know what your obligations are. With the help of a Crypto Tax Lawyer, you can create a strategy to minimize your tax obligations and keep more of your profits, all while staying up-to-date on your taxes.
A crypto tax strategy will help you avoid tax audits while still making sure you get the most out of your crypto investments.
1. Selling Crypto
Tax agencies like the Canada Revenue Agency treat crypto as a commodity. When you sell it, you have to report the profit (or loss) from the trade on your annual taxes. If you profited from the trade, you will likely have to pay either a capital gains tax or pay tax on the full profits.
With capital gains taxes, you pay taxes at the appropriate marginal tax rate on only 50% of the profits. You can also claim capital losses against your claim, so if you sold another asset at a loss that year, you can further reduce the taxes you pay. This also applies to the sale of NFTs.
2. Spending Crypto
There are a growing number of ways to spend cryptocurrency for goods and services. Unfortunately, tax collection agencies do not treat cryptocurrency like fiat currency. When you spend crypto, they treat it like a trade, and for tax purposes, you are considered to have sold it.
Tax agencies will use the fair market value at the time of the transaction to calculate your taxes. When you conduct a transaction with crypto, record the date and time of the transaction and the value of the crypto you used at the time. It’s important to keep your own records in case the exchange you used fails.
3. Mining Crypto
When you mine crypto, you may be taxed as a business. Business income taxes differ from capital gains taxes. Instead of only half of your profits being taxed, the entire amount will be considered part of your income.
4. What Happens When You Lose Crypto?
The rules for what happens when you lose crypto or have it stolen are not clearly outlined in many places. However, it may be possible to claim lost or stolen crypto as a capital loss or a business loss. It’s worth discussing with a tax lawyer who understands cryptocurrency.
5. Giving Crypto as a Gift or Donation
As major cryptocurrencies have become more mainstream, it’s become more common to give them as a gift to a friend or family member or even to make a donation to a registered charity.
When you give or donate cryptocurrency, you have to report it on your taxes as a disposition of the asset. You will have to pay taxes on it as though you sold it, according to the fair market value of the asset at the time of the gift or donation.