In the words of Benjamin Franklin, nothing is certain in this world except for death and taxes. If you’re under the illusion that cryptocurrencies are any different, then you may be in for a nasty surprise or two from the taxman by the time the next filing date rolls around.
It’s true that back in the earliest days of Bitcoin, crypto was magic internet money that you could keep all for yourself. However, those days are long behind us. In 2020, most countries, including the UK, the US, Canada, and many European nations, have issued specific guidance on the treatment of cryptocurrencies for tax purposes.
Government tax offices aren’t naive when it comes to collecting their dues. They know that there’ll be plenty of people who won’t want to come forward and declare their holdings. So in many jurisdictions, big exchanges such as Coinbase have been compelled to hand over customer data. Meaning that if you don’t take your crypto tax obligations seriously, there’s every chance that the tax authorities will come looking for you.
Find Out What You Need to Do
So what exactly are your obligations? The precise tax rules vary from country to country, so only your tax authority can tell you exactly what’s required in terms of reporting and tax payments. However, on a high level, it’s fair to say that cryptocurrencies aren’t generally treated as cash but as property or commodities for taxation purposes. This has some benefits, as it means that you may not need to report holdings that haven’t changed throughout the year.
However, if you’re actively transacting with your digital assets, then you’ll almost definitely have to declare your activities to the authorities. For example, in the UK, selling your crypto for fiat, exchanging it for another asset, or using it to pay for goods and services are all classed as taxable transactions.
Depending on your individual circumstances, the tax obligations could become pretty onerous. For example, if you’re involved with any kind of trading activity, you’ll need to report all your earnings based on gains per transaction. If you’ve sold any of your longer-term holdings, you’ll need to work out the gains. If you’ve used your BTC to pay for anything – even just a sandwich or a cup of coffee – you may need to declare it.
Automated Software Solutions
Nowadays there are automated solutions to make all this easier. One example is Cryptoworth CAP, a complete cryptocurrency portfolio management and accounting platform that allows enterprises and individuals to keep full track of their cryptocurrency portfolios, earnings, and transactions.
The company was created by its co-founders, who bring experience in enterprise software development and automation, together with cryptocurrency trading. Therefore, the company puts a significant focus on process automation using smart algorithms, AI, and price data oracles combined with an intuitive and easy-to-read dashboard.
Using such platforms eliminates all the pain of trying to track cryptocurrency transactions and gains using a spreadsheet or manual methods. It can consolidate multiple data sources covering over 2,000 cryptocurrencies, including blockchains, exchanges, CSV files, and more, into a single dashboard. Users can choose whether to synchronize their account manually or on-demand and quickly generate real-time reports on capital gains and losses.
By using a single system, users can reduce the manual effort and risk of errors that come with trying to reconcile all the addresses where they’ve transacted any cryptocurrency. It also works across multiple jurisdictions, as it can handle different methods of calculating cryptocurrency taxes. Enterprise users can also export reports for importing crypto data into their existing fiat accounting systems, providing a holistic overview of all their accounts.
A Focus on UX
One challenge that continues to be endemic across the crypto sector in exchanges and applications is poor user experience. However, modern automated platforms are the exception to this rule. For instance, Cryptoworth has a clean user interface, so even accounting teams who may not be familiar with crypto can easily interact with the software and use all of its features. The platform adheres to International Accounting Standards and International Financial Reporting Standards.
Cryptocurrency taxes aren’t going anywhere. Therefore, all those who are involved in regular transactions should consider crypto accounting as essential as their regular fiat accounting. Avoiding mistakes now means avoiding potential penalties further down the line, and using a dedicated application helps to free up time that could be better invested elsewhere.
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