For many investors around the world, the deadline to file your annual tax return is looming - which means one thing. You need to get your crypto taxes in order.
From the IRS to HMRC - tax offices globally have made it very clear that they expect investors to pay taxes on their crypto profits. Despite this, many investors are still unaware of how their crypto is taxed, which tax applies and how to calculate and report their crypto taxes.
Fortunately for WOO X users, crypto tax just got a whole lot easier as we’ve partnered with crypto tax calculator Koinly to present a five-minute crash course on all things crypto tax.
How is crypto taxed?
Crypto tax varies depending on the country you live in and the existing tax rules. You can get more information for your country in Koinly’s crypto tax guides, but there are some general principles that generally apply in most countries in the world.
Excluding Bitcoin in El Salvador, crypto is generally viewed as an asset or property for tax purposes. It’s this view that dictates its tax treatment, meaning crypto can be subject to Capital Gains Tax or Income Tax.
Crypto Capital Gains Tax
When you dispose of an asset - including crypto - you make a capital gain or loss. If you make a gain when you dispose of your crypto, you’ll pay Capital Gains Tax on it. Disposals of crypto include:
- Selling crypto for fiat currency, i.e. USD, GBP, CAD.
- Trading one crypto for another cryptocurrency - including stablecoins, tokens and NFTs.
- Spending crypto on goods or services.
- Gifting crypto - depending on where you live.
Meanwhile, if you make a loss, it’s not all bad news - you can actually offset these losses against your gains and reduce your tax bill. In some countries like the US, you can even offset losses against ordinary income.
Sometimes when you earn new tokens or coins, your tax office will view this as additional income and subject it to Income Tax. Tax offices vary in what they consider income, and some are much harsher than others, but broadly speaking, activities subject to Income Tax may include:
- Getting paid in crypto in exchange for a service.
- Staking rewards.
- Mining crypto.
- Airdrops and even potentially coins/tokens received from a hard fork.
- A variety of DeFi investment activities (more on this in a minute!)
If you’ve made additional income from crypto, you’ll need to calculate the fair market value of any tokens in your fiat currency on the day you received them and pay Income Tax on this sum. If you later dispose of those tokens, you may pay Capital Gains Tax on any gain too!
Is any crypto tax-free?
There’s some good news - you won’t always pay tax on your crypto transactions. Broadly speaking, you won’t pay tax when you:
- Buy crypto with fiat currency.
- Transfer crypto between your own wallets - but transfer fees may be a disposal.
- HODL crypto - unless you live somewhere with a Wealth Tax.
- Gift crypto - depending on where you live.
- Donate crypto to a registered charity.
What about DeFi taxes?
Many tax offices are yet to release guidance on DeFi taxes, which potentially makes navigating your tax liability from WOOFi or WOOFi Dex difficult. Investors need to apply the current guidance to their DeFi transactions.
Some of this is simple - for example, buying, selling and trading on dexes like WOOFi Dex will be treated the same as trading on centralized exchanges. But for activities like staking, liquidity mining and yield farming, it gets a lot more complicated as it all comes down to how the protocol you’re using works.
The easiest way to understand this is to identify whether you’re making a disposal, or whether you’re earning new tokens. We’ll take a look at some common transactions on WOOFi to explain.
There are two staking options available for the WOO token - WOOFi staking and WOO X staking, and these work slightly differently so it’s a good example of how the tax implications can vary.
When you stake WOO tokens on WOOFi , you receive xWOO tokens in return - representing your share of the staking pool. When you unstake, you'll burn xWOO to redeem your staked WOO tokens, plus your rewards in yield from your staking period. These transactions are most akin to a crypto-to-crypto trade, which means you’ll potentially pay capital gains tax both when you stake your WOO tokens and when you realize your rewards by unstaking your WOO tokens.
Meanwhile, staking on WOO X works slightly differently. On WOO X, you can stake your WOO tokens (and reap a variety of benefits such as zero-fee trading and free withdrawals) - but also receive a daily WOO airdrop. You can withdraw these tokens daily. As you're earning new tokens, this is more likely to be viewed as additional income and subject to Income Tax upon receipt.
How to calculate and report your crypto taxes
Now that you know how crypto is taxed, let’s take a look at how to calculate and report your WOO Network taxes.
Before you can report your crypto taxes, you need to calculate the figures you’ll be reporting - your gains, losses and income. If you’re doing this yourself, here’s how:
- Identify each taxable crypto transaction and the kind of tax that applies according to your country’s crypto tax rules.
- Calculate your cost basis using an approved cost basis method in your country.
- Identify the fair market value in your fiat currency of any crypto income on the day you received it.
- Calculate your capital gains and losses from each disposal of crypto.
- Calculate your net capital gain or loss for the financial year and your total income from crypto for the financial year.
You then need to take all this and report it to your tax office. Generally, this is as part of your annual tax return. While some are only interested in your net capital gain and income, others like the IRS want you to report every single disposal of crypto using a variety of forms. It can get time consuming quickly, especially if you’re an active investor using multiple exchanges and wallets.
WOO X pairs with Koinly automatically to calculate your gains, losses and income and generate your crypto tax report, ready to file with your tax office, saving you hours. Here’s how it works:
- Add data. On your account dashboard, click on ‘Add Data’ to bring up a list of supported wallets and exchanges. Search for ‘WOO X’ by typing in the search box.
- Connect to Koinly. Connection to Koinly can be made via generating an API key on your WOO X account. Or, you can manually upload a CSV file of your WOO X transaction history. Koinly uses AI to comb through your entire crypto transaction history and identify which transactions are taxable and which aren’t. Then it’ll calculate your cost basis, capital gains or losses, and the fair market value of any crypto income on the day you received it.
- Download your crypto tax report. Upgrade to a paid Koinly plan and download the tax report you need, when you need it. Koinly can generate a huge variety of reports for users around the world. These include IRS Form 8949 & Schedule D, HMRC Capital Gains Summary, the ATO myTax report, and many more.
- Use your crypto tax report to file your tax. Hand your report over to your accountant, upload your crypto tax report to your tax app, or file using paper forms.
WOO X users receive an exclusive discount on Koinly plans! Find out more.
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