You might owe more tax than you think on your Bitcoin

This post is for anyone who owned, traded or sold Bitcoin (or any other cryptocurrency) during 2017 and wants to understand their tax obligations with the IRS or CRA (Canada Revenue Agency).

Tax season is here and for most of us, this can be an overwhelming time. Filling out paperwork we don’t quite understand and hope we don’t miss anything especially not any deductions that could reduce our tax burden.

With 2017 coming to an end and what seemed like a cryptocurrency frenzy, this post is to help you clarify your basic tax obligations (for both the IRS and CRA) with regards to Bitcoin (or other cryptocurrencies) you held in 2017.


Breaking down tax obligations

Now, I have a finance background and a CPA designation, so this stuff has been engraved into my brain and comes easily to me but for everyone else who essentially has no idea what the bean counters are talking about, let me try and put it in more relatable terms.

Here’s the big picture.

Imagine you bought a house in 2010 for say $100,000 and assuming you’re not in the business of buying and flipping houses, you would have no tax obligations as a result of this purchase.

Once purchased, and as long as you keep the house in your name, there is no impact to you. Tax obligations are triggered when you perform any of the following:

  • Exchange or trade
  • Sell
  • Gift

Back to the house you bought in 2010 for $100,000. A couple years later, you’ve gotten settled in but you decided “well I don’t really like this location, I rather be closer to the city” and luckily enough, you know someone who has a house closer to the city but wants to live further out. You get to talking, realize the market price of each house happens to be more or less equal so you decide “hey, I like this location so let’s do it, I’ll trade you my house for yours”.

As far as the IRS and CRA are concerned, when you trade ANY good (car, house, land, boat, investments, you name it and it’s probably on the list), it’s deemed to have been disposed of. What that means is, even though no cash might have been exchanged, title has passed and as a result, you now have a tax obligation. This tax obligation is called a capital gain.

What does that really mean?

Well, it doesn’t take selling something and getting cash back to have a sale. Under tax laws in both the United States and Canada, when you exchange a good for something else, you have a sale (even though you didn’t get cash).

The exact same principle applies to Bitcoin and all cryptocurrencies. So, if you bought a Bitcoin and later decided to exchange it for another cryptocurrency, you now have a taxable capital gain or loss (depending on whether the cryptocurrency increased or decreased in value from purchase date to trade date)

For the visual folks out there, here’s a timeline of what the tax implications of the house look like:

tax obligation timeline and calculations resulting from purchase, trade and disposal of bitcoin or other cryptocurrencies

Now, assume you never traded the home back in 2012 and kept the same house from 2010 up to 2015. Then, you would you would proceed as if the cost base hadn’t increased with a trade and essentially calculate the gain based on the increase from the purchase price (instead of the trade value).

In other words, the house’s cost base stayed at $100,000 the entire time you owned it and when you sell it in 2015, you will have a $600,000 capital gain in that year ($600,000 selling price – $100,000 purchase price).

How does that impact you and your Bitcoin?

You might be thinking “great, I know what to do when I buy, trade or sell my house but how does this tie back to Bitcoin and cryptocurrencies?

Well, the same basic principles apply to Bitcoin and cryptocurrencies.

If in 2017, you bought $100,000 worth of Bitcoin and later in 2017 you decided you wanted to trade those Bitcoins for another cryptocurrency (now worth $300,000), you would have a capital gain of $200,000 ($300,000 – $100,000).

If, at the end of 2017, you decided you wanted to sell those cryptocurrencies but they were now worth $600,000, that sale would trigger an additional $300,000 in capital gains. In other words, when all these events (trade and sale) happened in 2017, you would have a total capital gain of $500,000 (I know it hurts to report that much in capital gains, but hey, if that’s what happened to you, then congratulations, you still made a ton of money).

On the other hand, if you had traded when they were worth $300,000 and done nothing with them for the remainder of the year, you would only have a $200,000 capital gain ($300,000 – $100,000).

So, as long as you do absolutely nothing with your cryptocurrency (no trading, no selling), then you have absolutely no tax implications. If, on the other hand, you traded or sold any Bitcoin or other cryptocurrencies, you have a tax obligation (in the form of a capital gain).

Final tips and advice

If you’re amongst the many people who engaged in a number of trades with your cryptocurrencies throughout the taxation year (January to December 2017), it can get tricky to determine what your investment was worth on the market when you traded. Needless to say, the more trades you made, the more tedious this task will be.

For those of you who aren’t sure where to start, what values to use or maybe don’t want to spend hours sifting through your transaction records, I would recommend using TaxToken. All you have to do is download the app, sync your account and it will track all historical capital gains or losses saving you time and money. It’s a pretty neat app and has many more features but working through your trades and figuring out the capital gains or losses is the point of focus of this post.

Please bear in mind that these are high-level taxation concepts and the income tax acts (of both the United States and Canada) are more complex than the principles above. This post is meant to give you an understanding of the basic principles, so you can have a high-level overview of what’s going on. Please be sure to speak to a tax advisor and if you should have any questions, reach out to me on a consulting basis.

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