With more people buying and selling crypto than ever, tax authorities around the world are increasingly demanding their portion of profits earned. In 2019, for instance, the UK’s tax authority ordered crypto exchanges to provide information on how much money their users were making.
So, whether you are investing personally in cryptocurrencies or are making investments for others, it is important to make sure you are complying with your crypto tax obligations. In the end, failing to keep your books accurately could leave you facing fines or worse.
In most countries, your crypto accounting responsibilities will change depending on whether you are involved in crypto as a purely personal investment or if your activities are viewed as a business. Here are the key things you’ll need to do to make sure your cryptocurrency activities stay on the right side of the taxman.
Are you an individual or a business?
When it comes to accounting, the key thing to figure out is whether the tax authorities in your country are likely to consider your crypto activities to be that of an individual or of a business.
A private individual
Definitions vary from one country to the next. However, if you are simply a ‘hobby’ investor who has purchased some Bitcoin over the years, you will usually be considered an individual. Similarly, if you are a Bitcoin miner but are just using spare computer power on a home PC, you’ll probably be viewed as an individual too.
If you spend most of your days making trades on various currencies (either for yourself or investing for customers) you will probably be considered a business in most countries. In the same way, if you have purchased several high-powered computers to do crypto mining which you plan to make a profit on, you will likely be viewed as a business.
Learn more: Read about the history of Bitcoin
Personal crypto accounting responsibilities
For hobby investors or occasional Bitcoin miners, your accounting responsibilities will not be overly complex. In many countries, you will be taxed on capital gains when you sell your cryptocurrency at a coin exchange and withdraw it as fiat (pounds sterling, Euros, dollars, Yen etc.) In countries like the UK, there is a tax-free allowance of £12,000 on capital gains, after which you will have to pay a levy of up to 20% (depending on which income bracket you fall into).
To comply with tax laws, you will need to:
- Keep records of any withdrawals from coin exchanges to fiat
- Keep records of any exchanges of cryptocurrencies (e.g. you sold Bitcoin for Ethereum and made a profit in the process – you need to work out the value of the profit in the local fiat currency)
- Recording whenever you gift cryptocurrency to someone else, or receive it as a gift
You will then have to complete an annual tax return and report any income you made from crypto that year.
Business crypto accounting responsibilities
If your cryptocurrency investing, trading or mining starts to look like a business, you will be liable to pay income tax on any profits you make. Different countries define being a business in different ways, but it usually involves the following kinds of factors:
- Your crypto activities are your main source of income
- You have customers whose money you invest
- You spend a significant amount of time trading (or electricity mining)
- You have employees
- You are organised like a business
Business owners and employees must pay income tax and often pay corporation tax too (if you are set up as a Limited Company). You will also be required to register your business with the relevant authorities. In the UK, for instance, you might choose to register as a Sole Trader, Partnership or Limited Company.
Businesses are legally required to keep strict records of their activities, and you will need to do much more reporting than a private individual:
- Record all crypto trades you make, in every cryptocurrency
- Record all deposits and withdrawals at crypto exchanges
- Report all profits you make
- Keep a note of any expenses and costs, and keep receipts
- Follow generally accepted accounting practices
- Pay income tax (and maybe corporation tax) annually
- Sign up for VAT when your revenues rise above a certain threshold
Due to the complexities involved in crypto accounting, most businesses opt to use a specialist accountant that understands the crypto sector well.
What crypto accounting records will you need to keep?
The specific records you need to keep will vary depending on the country you are based in and the kind of business you run. That said, you will normally need a system which records the following information:
- Types of cryptocurrencies you hold and where you hold them
- Dates and times of any trades, and whether they were bought or sold
- How many units you purchased
- The value of all transactions you make in a fiat currency (GBP, USD, EUR etc.) at the time of the trade
- Bank statements (Xace’s crypto bank account offers this feature)
You may find it easiest to record all this information in some form of crypto tax software.
Two certainties in this world: death and Bitcoin taxes
Since they first emerged in 2009, cryptocurrencies have exploded in popularity. And, while the first few years of crypto were something of a Wild West, tax authorities have begun clamping down and demanding their share.
Whether you are an occasional hobby investor or are running a small business, it is crucial to start making records of any trades, mining, withdrawals and purchases you make in order to comply with local tax laws. To begin with this might be a headache, yet the consequences of failing to do so could be much worse.
Whether you will be doing your accounting by yourself or are passing the work over to a specialist, it is very useful to manage your money with appropriate technology. Xace is a crypto and Bitcoin-friendly bank account which helps you and your accountant track income and expenses related to your activities and helps you keep all your earnings in one place.
To learn more, read about our crypto bank accounts today.