Is Exchanging Crypto a Taxable Event?
I had the unfortunate experience of having to explain to a close friend that yes trading between cryptos creates what is known as taxable events.
He couldn't possibly be alone so I think it's worth setting the record straight and making it clear what the tax implications are of buying, owning, and trading cryptocurrency.
Is Exchanging Crypto a Taxable Event?
Yes, generally speaking every time cryptocurrency is exchanged for another cryptocurrency or for fiat a taxable event is created. How the profits or losses are viewed in the eyes of the tax man depends on the type of trading that you're doing.
Here in Canada unless you're operating a business, generally buying and holding cryptocurrency and with some occasional trading will be taxable as capital gains under your personal income tax and taxed at your marginal tax rate.
Higher volume trading known as day trading may be viewed as a business which would require you to report and file your taxes as such. Under Canadian tax law an individual is required to report 50% of their gains as capital gains which will be taxable as per the law. For example if you earned earned $1,000 trading cryptocurrency you would be required to report $500 as taxable capital gains on your personal income tax filings.
What Are Crypto Taxable Events?
Any time a cryptocurrency is exchanged for another cryptocurrency or for fiat would be considered a taxable event. Every single time! I think is a shock to some as they expect that perhaps the only taxable event that is created is when you "cash out" by converting crypto back to fiat.
Unfortunately that is not the case, as all exchanging events are essentially taxable events.
- Selling or gifting cryptocurrency
- Trading or exchanging the cryptocurrency for another cryptocurrency
- Converting cryptocurrency into fiat
- Using crypto currency to buy goods
This means that every time you trade or exchange cryptocurrency it should be documented and reported on your taxes, so be sure to keep detailed records in case you are audited.
How is Crypto Airdrop Taxed?
Ah yes, magical airdrops, everyone loves free internet money! Being blessed by an airdrop is one of the most magical of moments in crypto, but what are the tax implications?
Turns out for both the CRA and IRS receiving a crypto airdrop is counted as income! That's ordinary taxable income, however once it's exchanged for anything else it would be counted as capital gains.
Let’s say the fair market value of the SPARK at the time he receives it is $5. He will have to pay ordinary income taxes on $5,000 ($5*1,000). In addition, the amount Max reports as ordinary income becomes his basis for the new SPARK ($5,000), and he will use it to calculate capital gains/losses if/when he sells his SPARK in the future. - https://www.cointracker.io/.
Some great advise a friend once gave, "don't get cute with the CRA". Don't try to pull any tricks, not worth it. Also I'm not an expert on taxes, for the best advise speak to an accountant with crypto experience, there should be a few of them out there by now.
Resource: Guide for cryptocurrency users and tax professionals
How To Avoid Crypto Taxes: Cashing out
Ciao for now,
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What??! Wow! I couldn’t have thought that. To my knowledge, it’s only when you cash out that tax is required to be paid. How wrong I’ve been. Thanks for the information, it’s crazy though....
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I would sure love if my government was as willing to stop taxing as it is to send out "free" money. What if we could say "hold the stimulus, just let me keep the money I earned" instead? That would sure be nice. That's what the "free stuff" people should be pushing for, but they're blinded by the tax credits and stimulus checks and all of that.
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I'm all for new ways of thinking about taxes,..or lack there of!
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You're knowledge base may require a patch in order to be up to date.. I had friend yesterday who was under the same impression, sadly he was wrong. All trading events are taxable events.. womp womp
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No you have to pay tax when ever you make a profit.
That is why I just buy and HODL.
Taxation is such a horrible reality for cryptocurrency, there is a ton of ambiguity and I predict a lot of publicizing of the rules in the next year as they begin to be more concrete with the rules
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all the new folks this bull run will need to figure it out. It's good for them, put on the big boy pants and adult for a second. I actually think the CRA has done a good job with the guide I linked to for Canadians, it's thorough.
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Adulting sucks a bit LOL. Thank you for this guide though, I'll check it out even though I'm American just to see what other nations are doing
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😂 yeah taxes are no fun. it is what it is I guess. At least here you only pay tax on 50% of your capital gains..
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Does Canadian law let you reduce your capital gains amount by loses you take?
you cant reduce income (from other sources) for same year but if you have a net capital loss you can apply it to the 3 preceding years or to any future year.
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Great post & a topic that needs to be more talked about.
The IRS has started to look deeper into Crypto, even changing the standard tax form to have a question about Crypto on the front page. Like you, I think it's best to not be cute with taxes and instead form a plan to ensure that taxes aren't being paid without reason.
Personally, I use Koinly to track all my tax related items for Crypto - The only thing I have to manually add in are my Banano earnings for Folding at Home on my old computer, otherwise Koinly takes care of it for me!
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