Tax time is coming, but unlike Winter in the popular series, Game of Thrones, it will not threaten mankind with extinction, but, perhaps, with financial ruin if you are unprepared. These words are especially relevant if you have invested, traded, or transferred the cryptocurrencies of your choice during the latest taxing period or before for that matter. Yes, unfortunately, profits made by buying and selling your favorite digital coins can result in serious tax consequences. If you have not studied the issue or sought advice, the clock may be ticking in your tax jurisdiction.
If you are lucky, however, and the exception to the rule, then your taxman may be either unprepared to deal with digital currencies or willing to ignore the topic altogether, but such may not be the case in a majority taxing districts. Taxmen may have been challenged by the new and mysterious notion of cryptocurrencies, not unlike regulators and government officials across the globe, but taxmen tend to be more aggressive when seeking new revenue, almost as if their annual bonuses depended upon the outcome.
Tax officials have actually been studying this issue for some time, but there is a lack of consistency in each group’s final interpretation. Are cryptos intangible assets, securities, commodities, or even a simple currency when bought or sold? Are gains to be recognized and reported as ordinary income or capital gains or not at all? What happens if you are paid for your services in cryptocurrency? What if you are mining coins – are they taxable, too? What if you cashed in for large gains in one period, then invested in a series of ICOs that went bust in another – are you “OK” from a tax point of view?
Unfortunately, several investors, including one very unlucky college student, have experienced that last item. Taxes, penalties, and interest are due on the previous gains. The losses, which occurred in the subsequent tax period, do not automatically offset the taxpayers’ liabilities, unless the prevailing opinions amongst tax authorities either do not apply or a special arrangement can be negotiated to correct the problem. Otherwise, tax payments must be made, and then losses carried back from the following year for a refund. Such are the pitfalls of crypto taxation in most parts of the world.
All, however, may not be lost. Check your local taxman’s website and search for “cryptocurrency taxation rules”. Most G20 agencies around the world have produced bulletins, “pdfs”, or circulated statements that clarify what you need to know. Assume for the moment that you will need impeccable transaction records that include, what you bought, when you bought it, how much you paid, the amount of your gain or loss you made when you sold it, and any other costs related to the transaction. Exchanging one “token “for another “token” may also be treated as a “sale”, too, but again, check with your local tax authority or tax return preparing professional.
Lastly, there are a few other things to keep in mind. Ignorance of the law is not a valid excuse. It is legal to avoid taxes, but not to evade them. In that very regard, a spokesperson for the Her Majesty’s Revenue and Customs (HMRC) in the U.K. has stated:
We will not hesitate to use the powers Parliament has made available to us to identify those who are intent on evading tax.
As challenging a task as it has been for global taxing authorities to define applicable rules for the taxation of digital currencies, they have been hard at work the past few years doing just that and reporting their findings to the general public. You can rest assured that your local tax professionals will have heard the news and be ready to counsel you on the most prudent course for you to follow.
To be forewarned is to be forearmed!