Crypto Tax Guide | What You Need to Know About Crypto Taxes

crypto tax guide

Taxes suck! But what sucks, even more, is not taking taxes seriously and then getting slammed with disgusting tax bills that you can’t pay. And I want to be very clear on something, tax regulations vary dramatically from one place to the next. You will almost certainly want to connect with a local accountant who actually understands crypto.

Some of the things I am mentioning in this crypto tax guide may apply to you, some may not. This should not be mistaken for professional tax advice. Instead, think of it as important topics to look into and learn more about. But one thing is absolutely for certain, tax collectors around the world have crypto in their crosshairs and they will be coming for you! 

Taxable Events 

Crypto is filled with oh so many taxable events depending on your jurisdiction. Here are a few that you may need to consider keeping track of. 

  • Selling: Well that is obvious! But, for real, every time you click the sell button make sure you record that sell. You did remember to track your purchase price too, right? 
  • Trading: Yes, of course, you need to pay taxes if you make money from trading. But, be careful! Because if you are trading with Bitcoin or Ethereum as your base pair and not using a stablecoin like USDC then you can get into BIG trouble tax-wise. Every time you trade your Bitcoin for an altcoin counts as selling your Bitcoin. You will be taxed. So if that Bitcoin is up 20% since you bought it then you immediately get hit a tax bill for that 20% gain when you trade it for an altcoin. 
  • Airdrops: There are lots of ways to get free coins in crypto, and airdrops have become a trendy way to make money. But just because you didn’t have to pay for these tokens, doesn’t mean you don’t need to pay taxes on them! 
  • Farming Rewards: Yep, those are going to get taxed too. Every time you claim rewards is a taxable event. 
  • Buying and Selling NFTs – In most cases buying an NFT can be a taxable event because you need to spend Ethereum or Solana to buy the NFT and buying the NFT counts as selling those assets. Using stablecoins when possible can help alleviate this problem. Likewise, when selling an NFT for a profit you will be taxed. Be careful too if you are selling it for ETH or SOL because you can get screwed easily. First, you can get taxed again when selling those assets later. Second, you can take a loss when the price of those coins fall in the future. Third, if the price of those assets fall and you have not set aside money for the taxes at the time of sale of the NFT then you could be in big trouble since you might need to sell your ETH or SOL for a significant loss just to cover your taxes and thus erasing any gains you had from the original sale. 
  • Wrapped Coins: Coins like Wrapped Bitcoin (WBTC) and Wrapped Ethereum are very popular in defi, but you can easily get screwed on these too. If you swap your Bitcoin to Wrapped Bitcoin, then guess what? That may count as a sale of your Bitcoin and could be a taxable event. 
  • LP Tokens: Often when you enter some kind of defi farm or liquidity pool then you will get a proxy token called an LP token which represents your stake in that platform. This can also be a taxable event. So for example, if you put your Ethereum in a Yearn Finance vault you will likely be taxed. That is unless you just bought the Ethereum and the price of Ethereum is the same as your purchase price when you deposit. But if you bought that ETH at a lower price and had the bright idea to put your assets to work… well expect to get hit with taxes because you just “sold” your Ethereum in exchange for that LP token and will be taxed on any gains you had since purchase. 

How to Pay Fewer Taxes 

Chances are there are quite a few things you could consider doing to pay the legal minimum for taxes. 

  • Hold Long Term: In many jurisdictions short-term and long-term gains are taxed differently. If this applies to you then you might be in for significant tax savings. In the USA for example, short-term gains are taxed at your normal tax rate and long-term gains can be as low as 0% depending on your income. 
  • Tax Loss Harvesting: A strategic form of tax reduction whereby you sell an asset at a loss to lock in a loss and thus get a tax deduction. Obviously taking losses is never ideal, but sometimes there are sneaky benefits to doing so. Some jurisdictions may even allow you to make deductions if you for example sell your Bitcoin, for Wrapped Bitcoin since they are different tokens but trade at different prices. So you can keep your Bitcoin exposure while getting a write-off. Such strategies should always be discussed with tax professionals. 
  • Start A Company: Depending on your crypto activities you might be able to start a company for your trading and investing. Depending on how much you make you may find that the company tax rate is lower than your personal tax rate and you could benefit from this lower rate. 
  • Retirement Accounts: There are an increasing number of ways to add Bitcoin to your retirement account. This means that if you are a long-term believer then you might be able to reap the rewards of tax-free Bitcoin when you retire. 
  • Charity: If you have made it big with crypto then you might consider giving some of your millions away to charity. They always need more money. And, you will get a nice tax write-off for your troubles. Win win!
  • Move: While it may sound extreme at first, moving can save you HUGE sums of taxes. Places like Dubai and the Bahamas have 0% taxes. Some countries just have lower taxes or schemes like Bali’s 5 year Nomad visa that allows you to live and work in Bali and pay no tax on international income. Portugal doesn’t tax crypto gains, if you are flexible in your life then this could be worth looking into. 

The reality of taxes is that they are a part of life for most of us. And since that is the case you need to take them seriously. Tax agencies may have been slow to catch up to the crypto craze, but they are here, and they are cracking down. So pay your taxes!!!

Crypto Tax Guide | What You Need to Know About Crypto Taxes - - 2022

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Crypto Tax Guide | What You Need to Know About Crypto Taxes - - 2022
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By Lark Davis

Combining cutting edge insider insights and done-for-you market analysis to deliver crypto investors the best opportunities to grow their wealth, stay ahead of the curve, and avoid costly mistakes! We cover DeFi, NFTs, Altcoins, Technical Analysis and more!