Cryptocurrencies are a hot topic, but with the boom of new tokens and coins, many people are left wondering how tax is calculated on their crypto portfolio. We’ll break down the rules as to how crypto taxes are calculated.
Rules to calculate tax on cryptocurrency:
- You must track every transaction of your cryptocurrency portfolio that has led to your current value. This includes purchases and sales, transfers between wallets, and exchanges between different cryptocurrencies (more on those below).
- When you calculate your capital gain/loss, you must use the fair market value (FMV). This can be calculated by the previous exchange rate for cryptocurrency, if it was exchanged for another currency or if it was used to purchase goods or services.
- Your gain/loss is calculated by subtracting your item’s FMV from its proceeds (capital gains), and adding any expenses that were necessary to derive those proceeds (capital losses).
- If a coin is listed on an exchange, it is considered a capital asset and any gains are considered passive income. This is because the coin did not directly contribute to your business revenue.
- Capital gains on coins that have been held longer than a year are considered long term capital gains and are taxed at half the rate of short-term capital gains.
- If you are mining cryptocurrencies, it is not considered income but rather a hobby. This means you will not receive a T-4 Slip for your mining activities, and therefore no taxes will be calculated for your hobby tax return. This also means that capital losses from your mining operation cannot be used against other revenue on your tax return.
- Any revenue outside of India is subject to Indian taxes, and must be reported on your tax return. Payments made in cryptocurrency are still taxed if they were received as payment for goods or services, or sold as “trading” assets.
- When you trade one cryptocurrency for another, you will have a capital gain/loss based on the FMV of the token at the time of transfer, and the coin traded when it was exchanged for the new token. The exchange rate used on exchanges are under their discretion, although many exchanges do use a recent average of prices.
- Keep track of any coin you receive in exchange for goods or services, or are sold as a “trading” asset. These will be subject to capital gains/losses on your tax return that must be included in your capital gains calculation.
- Virtual currencies are not considered income. Any Bitcoin, Ethereum or other coin that users have credited to their digital wallet and has not been directly transferred is considered a digital currency (also called cryptocurrency).
- If you sell the token back into fiat currency, you will have a capital loss and the coin will be reclassified as income and you have to pay tax on cryptocurrency (i.e. it is no longer considered a digital currency but rather income).
- Any cryptocurrency that has been listed on Indian exchange is considered a “trading” asset and will be regarded as capital gains/losses.
- Cryptocurrency transaction records must be kept for 7 years, which is the same as any other tax records.
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