Should I be concerned about reporting requirements when using digital currency?
Not reporting income from domestic or foreign sources is illegal.
Americans and Canadians should know that the Internal Revenue Service (IRS ) and Canada Revenue Agency (CRA) are very active in pursuing cases of non-compliance, in order to ensure that the tax system remains fair for everyone.
For example, if you purchased 10 bitcoins for $90,000, but sold them four months later for $132,400, you would have to declare a capital gain of $42,400.
When cryptocurrencies are used to pay for goods or services, the rules for barter transactions apply.
For example, if a merchant accepts Bitcoin in exchange for a desk, a pair of glasses or jewelry — all items that can currently be bought using Bitcoin — the seller will need to include the fair market value of the good or service sold in their income for tax purposes.
“The act of buying Bitcoin or receiving Bitcoin should not be taxable,”
“The act of using Bitcoin, will be taxable.”
GST or HST also apply on the value of any goods or services purchased using cryptocurrencies.
I was mining in cryptocurrency. What should I do?
If you are cryptocurrency mining — using powerful computers to process complex online cryptocurrency transactions in exchange for more cryptocurrency — that has tax implications as well.
I was paid in cryptocurrency. What should I do?
If your employer has paid you with cryptocurrency, it’s like being paid with money. You will be required to pay income tax on your earnings.
If you are an independent contractor and you have been paid with cryptocurrency, again, from a tax perspective, it’s like being paid with money. You need to pay income tax and collect GST/HST, but you can also deduct associated expenses and claim input tax credits.
But I don’t pay tax unless I actually cash out, right?
Nope. This is one of the problems. You may have a taxable event even if you don’t formally cash out. Anyone using cryptocurrency to pay for goods or services must treat each purchase as a sale.I know there’s confusion over this treatment, but think of it like this:
If you trade in your Amazon shares for Microsoft shares, that’s a taxable transaction, even if you don’t take cash out of your brokerage account. Same analysis.
What if I lose money?
If your realized losses exceed your realized gains, you have a capital loss for tax purposes. You can claim up to $3,000 (or $1,500 if you are married filing separately) of capital losses and the amount of your loss offsets your taxable income for the tax year. If your losses exceed those limits, you can carry the loss forward to later years subject to certain limitations and restrictions.
Spending crypto is a tax event and may generate capital gains or losses, which can be short-term or long-term. For example, say you bought one coin for $100. If that coin was then worth $200 and you bought a $200 gift card, there is a $100 taxable gain. Depending on the holding period, it could be a short- or long-term capital gain subject to different rates.
The takeaway ?
If you fail to report your taxes or you file incorrectly, the IRS or CRA could charge you penalties and interest later which could cost you a fair amount of money. Considering how big of a deal cryptocurrencies are right now, there’s a good chance that the IRS and CRA are keeping an eye on things.
You may think that these transactions can’t be traced back to you, by usernames exist and so do the exchange records.
It’s no secret that Taxman is making reporting cryptocurrency a compliance priority. Stay ahead of the game by making sure your records and tax reporting are above-board.
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