How cointracking can lead to minimised crypto tax?

Crypto Accounting
August 16, 2021

What is cointracking?

Contracking is keeping a record of all crypto transactions to the smallest details. 

For example:

  • If you buy 1 Bitcoin on June 18th 2021 at 2:20 PM, you will want to record the value of that purchase which was 35,767.70 USD for 1 Bitcoin.
  • Then when you sell that 1 Bitcoin on November 5th, 2021 at 3:41pm you will want to record the value of sale which at that time would have been 61,073.10 USD. 
  • This would result in a profit of 25,305.40 which is also called capital gains which we will discuss later. 

The point of cointracking is to always keep track of the value of the crypto currency you’ve purchased. With enough knowledge, you’ll know when to sell and buy more crypto as you continuously track the market. 

What happens when I buy things with crypto?

So when you use your crypto to purchase something like NFT or even other cryptocurrencies, you in essence sell your crypto back into FIAT currency, which is normal currency like USD, CAD, EUR, and use that FIATA currency to purchase the new asset. 

When you sell your cryptocurrency you however trigger tax activity. You need to report on the gain or loss of that crypto currency. So in the example above where you made a profit of 25,305.40 USD you will need to pay tax on that profit. 

What if I buy cryptocurrency more than once, how do I know which one I’ve sold? 

If you buy Bitcoin, for example, 5 times in 2021, it is your responsibility to keep track and record the date and time of those transactions. When you go sell some Bitcoin to buy a coffee for example, you need to report in your taxes the specific Bitcoin you sold the profit or maybe even loss that you incurred. 

So ideally, you want to sell the crypto that costs you the most to buy so that you can minimise your crypto capital gains tax liability. 

For example

  • If you bought 1 Bitcoin on May 4th, 2021, it would have cost you 48,646.86 USD. 
  • If you bought a 2nd Bitcoin on June 30th, 2021, it would have cost you 32,443.06 USD. 
  • If you then use 1 Bitcoin on Feb 14th, 2022 to buy a car for 39,340.22 USD (Price of Bitcoin at that time to make it easy). You will want to sell the Bitcoin you bought on May 4th, 2021 because you would report a loss to your tax authority of -9,306.64 USD. 
  • If you sold the Bitcoin you bought on June 30th to buy that car, you would report a gain of 6,897.16 USD and have to pay a tax. 

In a nutshell, you always want to sell the crypto you bought at the highest price when purchasing any goods, services or other cryptos. This in turn minimizes your capital gains tax liability. 

What if I sell crypto that I bought less than 1 year ago? 

In addition to selling crypto you bought at the highest price, you also want to sell the crypto you bought furthest back. For example, if you bought crypto in June 2021 and crypto in June 2020, you want to sell the crypto you bought in June 2020 because then you will be taxed as capital gains. 

In the U.S, crypto that is bought and sold within a 12 month period is considered as ordinary income meaning you pay regular income tax for the gains you make. Crypto that is bought and sold after 12 months is considered liable for capital gains tax and is taxed at a lower rate than your ordinary income. 

It is important to note that each country places a different time period that applies to income tax vs capital gains. The U.S, it is a 12 month time period while Switzerland is a 6 month time period. 

Considering both time and costs, which crypto should I sell when purchasing goods, services or other crypto? 

You should always aim to sell crypto that was bought more than 12 months ago with the highest cost basis. 

For example: 

  • If you bought bitcoin on July 16th 2021 for 31,576.20 USD
  • And bought Bitcoin on April 3rd 2020 for 6.874.77 USD
  • In this scenario, you would be making a mistake if you sold the bitcoin that cost you the most to buy on July 16th, 2021 for 31,576.20 USD
  • Because you would be liable to add those gains to your ordinary income and pay a higher tax. 
  • In this scenario, you have to apply a time value and sell the crypto you bought on April 3rd, 2020 realising a larger gain but get taxed as capital gains overall, paying less taxes and being able to keep the profits. 

It is important to apply both a time and cost factor when assessing which cryptos to transact with. 

Are there other factors that impact whether crypto is taxed as income tax vs capital gains? 

There are other factors than simply time that dictate whether crypto is taxed as income or capital gains tax. 

For example: 

  • Foreign financing of cryptocurrency. 
  • A total volume of transactions in any calendar year that exceeds a certain multiple of your total assets at the beginning of the tax period. In Switzerland, that multiple is five times. 
  • The need to raise capital from cryptocurrency transactions to make up for lost income
  • Capital gains are smaller than a certain percentage of the total income in the respective tax period. For Switzerland, this is 50%. 
  • Derivatives are solely used for hedging.

If you want to be safe, please consult a professional accountant in the Web 3.0 space for a full assessment of your circumstances in determining your tax obligations. 

Is mining crypto considered as income tax or capital gains tax? 

For miners, the question is whether mining is carried out as a self-employed activity. If so, the cryptocurrency revenue generated from mining is liable for income tax and any capital gains made from the sale after short selling the crypto currency needs to be reported and taxed as capital gains. 

Many countries are still debating the classification of mining. In Switzerland for example, the Cantons of Bern and Zurich have determined that a miner’s activity should always be considered to be self-employed activity and taxed as income, whilst the FTA and the Cantons of Zug and Lucerne look at the nature of such activity on a case-by-case basis before making their decision.

Is staking crypto considered as income tax or capital gains tax?

Staking rewards are treated like mining earnings and are taxed based on the fair market value of your rewards on the day you received them.

Are airdrops considered as income tax or capital gains tax?

Airdrops are taxable as income Tax at your regular Income Tax rate based on the fair market value of the crypto you receive on the day you receive it. They are not taxed however as they go out or converted into FIAT currency. 

What if I get paid in crypto, do I pay income tax or capital gains tax? 

If you are employed by a company and they pay you in crypto, you’re responsible for reporting it as income. It does not fall in the category of capital gains. Similarly, if you are a contractor and you provide goods and services in exchange for crypto, this is also seen as revenue and is subject to corporate tax. 

What if I earn interest from holding crypto? 

You might earn a return such as interest by holding certain cryptocurrencies. This is considered as income and is taxed as income. Tax agencies also treat this differently from interest you earned at a bank so it’s important to be aware of all the tax implications. 

Is staking crypto considered as income tax or capital gains tax?

Staking rewards are treated like mining earnings and are taxed based on the fair market value of your rewards on the day you received them.

I received a gift in crypto, am I taxable?

If you received crypto as a gift, you’re not likely to incur a tax until you sell or participate in another taxable activity like staking. 

You can also choose to give gifts up to a certain amount which are non taxable depending on the country. In the U.S, that amount is 15,000 USD per person per year. You will however need to file a gift tax return which does not result in tax liability but is required to notify the tax authorities. 

In Switzerland, each canton sets its own rules for Gift Tax in Switzerland - rates vary between 2% and 36% depending on the amount and the asset that was gifted. In some cantons - you'll pay no Gift Tax on gifts to relatives or spouses, while in others you'll pay a reduced rate of Gift Tax to relatives and spouses. 

Are gas fees taxed or deductible?

Gas fees, in some cases, are tax deductible depending on the specific transaction you’re making. As an individual, you cannot deduct gas fees from your taxable income however as a business, in some circumstances, you can deduct gas fees from the revenue base as the cost of goods sold. 

If you're buying, selling or trading crypto, you can add the gas fee to your cost basis therefore reducing your capital gains or income tax liability by reporting less gains or income. Sometimes when you transfer crypto between wallets, you’ll pay a gas fee. This fee however cannot be added to your cost basis to lower your capital gains or income tax. 

If you're earning rewards and paying gas fees, you cannot add the gas fee to your cost basis.

Can a crypto exchange help me file taxes? 

Some exchanges, like Robinhood, may issue a tax such as a Form 1099-B  for the U.S to help you determine gains and losses. Ultimately, you’re responsible for tracking your taxable activities and your currency’s fair market value. 

This will change for the 2023 tax year whereby crypto exchanges will be required to issue a tax form such as a 1099-B. In other words, crypto exchanges will be required to notify tax authorities such as the IRS directly of your crypto transactions. Important to note this will only apply for the 2023 tax year and not  for 2021 and 2022 tax years. 

How does a Web 3.0 accountant help? 

What happens to most crypto traders or those engaging in crypto transactions is they only realise their tax burden at the end of the year. At that point, it is too late to optimise for your crypto tax. 

You need to be on point throughout the entire year aware of the crypto you're selling or buying based on your intentions. This is where a Web 3.0 accountant comes in handy. They provide guidance and real time visibility into the crypto you’ve purchased and which ones you should be selling when transacting. 

Come year end, you are not hit with an unexpected major tax bill because throughout the year you have been optimising for capital tax in your crypto portfolio. 

What is the best way to calculate crypto tax? 

You’ve heard of accounting methods such as LIFO, HIFO, ACB and others to help calculate your crypto tax liability at year end however you will need to check with local country regulations to identify which accounting methods can be used in the country. 

Some accountants may have advised the most optimal accounting method is HIFO however HIFO does not take into consideration the time component and so you could be required to pay income tax on a crypto transaction based on this accounting method meanwhile you could have paid capital gains tax. 

The most optimal approach is to track the specific IDs of the crypto transactions you’ve made in order to use the actual cost basis for the asset you sold. This is much easier to track with digital assets thanks to a transaction hash number, a unique identifier that is generated whenever a transaction is performed on the blockchain. It can be used to track and trace the status of a transaction. 

Search Pivot