Crypto On-Chain Degen Taxes 101
The season we rather erase out of our minds.
As someone that is running a substack for on-chain degens, it made sense to cover a degen’s nightmare as well. For impatient readers you have a summary at the end going through my thoughts.
Why is the first quarter of every year is always the most stressful for degens around the world? Taxes. Q1 is tax season in a number of countries around the world, and in a lot of places, crypto is taxed alongside other investments like real estate, stocks and bonds.
Given the US tax season is less than 2 weeks away, I thought it would be worth covering crypto taxes briefly to help you get through the nightmare. Let’s look at the general IRS rules related to crypto taxes, the easiest way to file your crypto taxes, and some tips to avoid getting rekt by the tax man during the bull run.
Bear in mind, this article uses the US as an example but it is applicable to countless of countries across the globe.
Basic IRS Rules
The IRS (and many other tax authorities globally) treat crypto as property rather than currency. This mean the same tax rules that apply to crypto as real estate, stocks and bonds. This means that there are two main types of tax you need to be aware of when it comes to crypto: Capital Gains Tax (CGT) and Income Tax.
To keep it simple, you will trigger CGT when you dispose of a crypto asset for more than you acquired it for.
Income tax events occur when you earn crypto in a way that resembles income. The key point to remember with income is that the value of the crypto when you recieve it into your wallet is what matters.
Here’s a few examples of activities that trigger each:
Capital Gains Tax
Selling crypto to fiat
Swapping one crypto for another
Purchasing goods or services with crypto
Swapping crypto to NFTs or vice versa
Depositing into smart contracts (grey area)
Income Tax
Airdrops
Staking/DeFi/Farming rewards
Salary paid in crypto
Crypto received as the result of a hard fork
Mining
This should all be pretty common knowledge.
Don’t Risk Your Gains
Some of you are probably reading this thinking “Yea, whatever. I’m not going to pay tax on my crypto. The taxman doesn’t even know about it anyway.”
Unfortunately this isn’t the case. The IRS (along with many other tax authorities globally) are cracking down on taxing crypto assets. The IRS has even added a digital asset section to Form 8949! There’s a misconception in the crypto community that crypto is somehow out of reach from the tax man. Tax authorities around the world work directly with centralised crypto exchanges to collect data on KYC’d customer, including withdrawal addresses.
If you have KYC’d to a crypto exchange, onramped fiat into crypto and then moved your crypto to a wallet via a public blockchain, unfortunately that wallet and all associated interactions can easily be traced back to your identity. Mixers and privacy services aren’t much help either, as the tax man will likely just treat this as a disposal event anyway and in some countries, uing these services could incur penalties or worse.
The blockchain is a permanent, transparent, publicly available ledger of all transactions. It is probably the worst place possible to conduct illicit activities if the funds can be tied back to your IRL identity in any way, shape or form. Keep this in mind before considering risking your gains by not reporting. This is contrary to what any person that has zero understanding of crypto usually says. Typical.
How To Get Your Crypto Taxes Sorted
You basically have three options for sorting out your crypto taxes.
Manually calculate them using excel spreadsheets
Only really an option for people only making a couple of transactions a year on a centralised exchange. If you’ve moved onchain, goodluck trying to do the calcs manually without pulling all your hair out.
Use tax software
If you’re here, this is most likely the best option for you. Tax software helps to automate the process of pulling in all your transactions from wallets and exchanges, handle currency pricing and bucket your gains, losses and income for easy filing.There is a number of tax software providers out there, but there aren’t many options that are built to handle onchain transactions. I recommend Crypto Tax Calculator for this reason. The product is solid, adds support for all the new chains and integrates directly with many DeFi protocols, such as GMX, and if there is any issues, the support team actually get crypto and are very helpful. I’ve negotiated a 20% discount off their plans for all my subscribers. Use the code DEGEN20 to redeem until May 1st.
File with an accountant
This is typically the more expensive option but can give greater peace of mind. Be sure to go to a crypto specialist accountant if you have a portfolio that is even remotely complex, otherwise you’ll waste money on wasted hours as the accountant upskills on your dime.
You can connect with an account via Crypto Tax Calculator as well. The majority of crypto accountants use CTC anyway.
Forward Thinking
Given many of you probably feeling the pain of crypto taxes right now, it seems like a reasonable time to hammer home a few forward looking tips so you can make the most of the bull run and avoid being in a bad situation next year.
Remember, for most countries the decisions you make after the end of the tax year do very little to help you case for the previous tax year. You must take action throughout the year to make sure you are in a good position for filing.
Monitor Income
In countries like the US or Australia where you are very limited in your ability to offset income with capital losses, it is pretty crucial to stay on top of crypto income events and make sure you are setting aside funds to cover the tax bill. This does not mean sell your farming rewards into a memecoin, this means setting aside stables or fiat to make sure you aren’t caught out with a huge income tax bill next year with nothing to show for it (happens a lot).
Sync Transactions To Tax Software Regularly
Even if you don’t plan on using tax software to file, you can use the free version of most tax software to monitor your transactions and tax position throughout the year. You can also keep track of what each transaction is and leaves notes for anything nuanced in case of a future audit.
Syncing transactions regularly, such as fortnightly or monthly depending on how active you are, can make the whole filing process next year much easier. There’s nothing worse than digging through hundreds of transactions a year later trying to figure out what is going on.
Keeping records is good practice no matter what, and will pay dividends in the future.
Tax Loss Harvest
In a number of countries, including the US, you can use capital losses to offset capital gains in the same and future tax years. If its approaching December 31 and you have some investments that are sitting at a loss, you could opt to cut these before the end of the tax year to lock in the loss and reduce your tax. Obviously, you’d have to weigh up whether it’s worth cutting the investment to save on tax.
My own thoughts
Make sure you take the decision you’re the most comfortable with, I’ve shared it in this newsletter before but Crypto Tax Calculator is definitely my choice and has saved me a lot of headaches since early 2023 and will continue to do so which is why I’ve teamed up with them.
If you have any questions for the team you can reach out to them on Twitter or go directly to the website to get in touch. If you use the DEGEN20 code to get a 20% discount on your first year and are happy with the service feel free to let me know as it would be appreciated to know I’ve helped one person relieve their tax headache.
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Wallet security overview for beginners here.
Disclaimer: All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing on the site constitutes professional and/or financial advice, nor does any information on the site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. This post may contain affiliate links. I am just sharing an opinion.