Investing in crypto can bring a lot of money, but working out the tax part is very hard and often does not make sense. From staking rewards, to NFT flips, every activity can have tax implications that you can simply overlook and forget about.
When dealing with taxes, knowledge and tools can help you remain compliant and avoid unnecessary stress.
Don’t Forget Small Crypto Taxes
Not everything that is taxable is evident. It’s easy to forget the small crypto earnings like free tokens or bonuses, and that can cause problems at tax time.
As an example, you may get a promotion of an item of value in the form of a token worth $50; this value is normally considered ordinary income. Should you sell it later at $200, you will also realize the capital gain, which is $150. The loss of the initial $50 can cause reporting to be incomplete, and this can be an issue, as it can be an eye-opener during an audit.
It is extremely important to be thorough in recording these events. They can be assisted by automated crypto tax platforms, which will automatically capture and classify them.
Don’t Mishandle Mining and Staking Taxes
Earning crypto through mining or staking is passive, but the tax paperwork isn’t. Rewards in most jurisdictions are subject to inclusion in taxable income, rather than to taxable income only upon sale. The fair market value at receipt becomes your cost basis.
For example, on June 1, you mined 0.05 BTC, and at the time it is now worth $3,000, you need to record that as income – even though you did not sell it. Any difference in prices at the time you dispose of the BTC results in a loss or gain on capital.
Other deductions could be thought of as mining expenses, such as electricity, hardware depreciation, or hosting services, but these deductions are typically only accessible when your mining is regarded as a business but not a hobby. If you’re curious how block rewards work, there are Bitcoin mining sites that explain it.
Track Transfers Between Exchanges
The transfer of assets within your own wallets or exchanges is normally non-taxable. The amount you pay on those transfers, though, may be taxable.
As an example, when you transfer 1 ETH on Binance to Coinbase and pay 0.01 ETH, the payment can be regarded as a disposal. This might reduce your cost basis or create a small tax bill, depending on where you live. In a single operation, these charges may be minor, but when performed in dozens of transfers, they may become significant.
Forgetting About NFTs
NFTs are taxable similarly to other digital assets. The sale or swap of an NFT is generally treated as a taxable disposal, and the receipt of one through an airdrop may be taxed on fair market value.
One distinction: NFT minting does not invariably qualify as a taxable event. In most jurisdictions, the minting expense (gas fee) is a general add-on to your cost base. Take the example of minting an NFT that costs you 20 ETH and sells at 500, which results in a profit of 480.
Overlooking DeFi and Liquidity Pools
Liquidity provision, yield farming, and governance activities in DeFi are taxable and create a lot of complexity. An example is saving tokens in a liquidity pool, which is considered a sale, and the tokens you acquire thereafter are new purchases, which is considered a purchase.
Yield farming rewards are taxed as income on the day you receive them. It also happens even in borrowing and lending of money, with tax implications based on the local law. The most significant obstacle is that most individuals do not know that they should report such transactions because many DeFi platforms do not present clear tax statements.
Staying Ahead
The tax regulations are changing as fast as crypto. Tax authorities are paying closer attention to crypto than ever before. To stay compliant and avoid stress, make sure you report all staking rewards, account for every transaction fee, and correctly classify your NFT buys and sells.
