Introduction
Welcome to our guide on understanding and navigating your tax report. Designed with clarity in mind, this guide aims to decode the report's structure and translate it into straightforward, easy-to-understand information. In this guide, we will show you how to interpret the data in your report.
Section 1: Settings
Users can tailor their preferences on the settings page prior to generating a report. This includes various options such as choosing a country and setting the tax report period. After the report has been generated and downloaded, users will be guided to the overview, as outlined in Section 2. The subsequent information highlights the most critical settings for this country.
Important Settings:
Accounting method
We understand that proper financial management is crucial when dealing with cryptocurrencies, which is why we provide multiple accounting methods for you to choose from. Our options include First-In-First-Out (FIFO), Last-In-First-Out (LIFO), Highest-In-First-Out (HIFO) and Multi-Use (MULTI) among others. We suggest using the First-In-First-Out method.
Here is a brief overview of these methods:
First-In-First-Out (FIFO): This method assumes that the first assets you acquired are also the first ones you sold or exchanged. FIFO is a commonly recommended approach in many jurisdictions due to its simplicity and wide acceptance.
Last-In-First-Out (LIFO): In contrast to FIFO, the LIFO method assumes that the last assets you acquired are the first ones sold or exchanged. This can be beneficial in certain tax situations, particularly in a market of declining prices.
Highest-In-First-Out (HIFO): HIFO assumes that the assets acquired at the highest price are the first ones sold. This method can help to minimize capital gains and hence, reduce your tax liabilities.
Multi-Use for Individual Tax Years (MULTI): This method allows you to employ different accounting strategies for each tax year. Unlike FIFO, which consistently uses the first-acquired assets for calculations, Multi-Use offers flexibility to switch between methods like FIFO, LIFO, or others based on annual tax strategy.
Each method has its own advantages and is suitable for different situations, therefore your choice should depend on your individual financial circumstances and the specific tax regulations in your country. FIFO is typically used in the US.
Depot Separation
The Depot Separation (Tax Lots) feature in CoinTracking is designed to calculate the cost basis for each of your exchanges and wallets as separate entities, rather than aggregating them into a single lot. The assessment is reliable as long as all transactions for deposits and withdrawals across your different exchanges and wallets are fully and accurately documented in your CoinTracking account.
FBAR Report
The Foreign Bank and Financial Accounts Report (FBAR) for US citizens is designed to assess the highest daily value, in USD, across all your exchanges and wallets throughout the tax year. This evaluation is accurate provided all deposits and withdrawals have been properly recorded in your account currency. It's a crucial tool in maintaining compliance with international financial reporting standards.
Group by day
This feature allows daily grouping of transactions, useful if time zones were not accurately captured during import, and for reducing tax report items. Recommended for day traders in different time zones. For precise calculations, disable it. Although U.S. authorities don't permit this function, it is offered for potential use. Always check local regulations before use.
In addition to the functionalities already discussed, our platform offers numerous additional settings. For each setting, you will find an 'I ' symbol; this is the infobox which gives you detailed explanations about each setting. As you navigate the platform, these infoboxes will serve as your guide.
Section 2: Overview
Our tax report classifies transactions according to their respective tax regulations. Transactions involving the sale of cryptocurrencies fall under the domain of long-term and short-term capital gains, whereas any income earned or airdropped into your wallet is usually categorized as ongoing income.
In this section, we aim to decode the various transaction types that can appear in your tax report. Understanding these transactions is crucial for identifying their tax implications, as well as their role as potential income sources. In this explanation, the following sections are elaborated on.
1.1.Short-term capital gains/losses
1.2. Long-term capital gains/losses
1.3. Ongoing income from cryptocurrencies and NFT
2. Non-taxable income from cryptocurrency and NFT trading
3. Other cryptocurrency and NFT payments
Capital Gains (Short & Long Term)
The transactions highlighted in the following section are basic transactions involving cryptocurrencies. These cryptocurrencies are purchased and then either sold in exchange for other cryptocurrencies or fiat currencies, or transferred to an external wallet not owned by you. The profits that arise from these transactions generally qualify as capital gains.
Capital gains arise when a capital asset, like stocks or cryptocurrencies, appreciates in value. This appreciation, which enhances your capital or wealth, becomes taxable when the asset is sold or exchanged.
In the U.S., the duration for which you hold your crypto and NFT assets considerably affects their tax implications. Assets held for less than a year yield short-term capital gains, sourced from crypto and NFT trades, margins, derivatives, and futures. These gains are taxed at a rate ranging from 10% to 37%. Within the same tax year, any corresponding losses can be used to offset these gains.
In contrast, long-term capital gains arise from assets held for over a year. These gains benefit from a lower tax rate, varying between 0% and 20%. Like short-term holdings, any losses incurred can offset these gains within the tax year.
It is essential to keep these rules in mind for all transactions involving cryptocurrencies, derivatives, or NFTs. Time conscious asset management can be beneficial for tax purposes. Transactions usually triggering capital gain include trade, spend, fees in cryptocurrency, remove, and provide liquidity.
This is how short-term capital gains are stated in CoinTracking
In July 2022, A bought 1 BTC for 100 USD. By August 2022, A sold this 1 BTC for 200 USD, thereby realizing a capital gain of 100 USD. This 100 USD profit is registered under section 1.1.1 Realized capital gains/losses from cryptocurrency trading.
This is how long-term capital gains are stated in CoinTracking
In addition to the short-term capital gain, A made a purchase in July 2021, acquiring 1 APE NFT for 100 USD. A year later, in July 2022, A sold this APE NFT, thus generating a long-term capital gain. This gain is recorded under section 1.2.2 Realized capital gains/losses from NFT trading.
Furthermore, profits from margin trading, derivatives, and futures are classified as capital gains, as they represent profits from the sale of assets. The precise categorization can vary based on local tax laws, but usually, when these types of investments are sold for more than the purchase price, the profit is considered a capital gain, whether long or short-term.
Transaction types typically regarded as capital gains from margins, derivatives, and futures include margin gain, derivatives/futures gain, margin loss, margin fee, derivatives/futures loss, and settlement fee.
On July 1, 2022, A made a margin profit of 100 USD. The very next day, on July 2, 2022, A incurred a margin loss of 50 USD. As a result, A realized a short-term capital gain of 50 USD (100 USD profit - 50 USD loss). This 50 USD gain is documented under the section 1.1.3 Realized capital gains/losses from margin, derivatives, futures.
Income
Cryptocurrency income refers to earnings accrued from diverse crypto-related activities. Tax liability arises when control over the cryptocurrency asset is confirmed, and its value is quantifiable in real-world terms. Be aware that such income requires the completion of two distinct Schedules on Form 1040. Interest-derived income is recorded under Schedule B Part 1, while dividends fall under Schedule B Part 2. Any other income is captured under Schedule 1 Part 1 of Form 1040. It is crucial to accurately document these details for correct tax reporting.
The following transaction types are typically considered as income: Income, Reward / Bonus, Staking, Mining, Airdrop, Masternode, Dividends income, Lending income, Interest income, Other income, LP Rewards.
On July 1, 2022, A received a mining reward of 0.5 BTC, valued at 20.000 USD. Then, on July 2, 2022, A received an airdrop reward of 100 AVAX, worth 100 USD. These forms of income, both from mining and airdrop rewards, are subject to the standard income tax rate and are collectively registered under section 1.3.2 Other income.
Non-taxable income
Non-taxable cryptocurrency income refers to specific categories of income, such as certain types of airdrops, which are distinct from capital gains and other income. We present this separately for clarity. However, it is crucial to consult with a tax professional or your local tax authority for the most accurate and up to date information.
The following transaction types are typically considered as non-taxable income: Airdrop non-taxable, Income non-taxable.
On October 1, 2022, A received non-taxable income in the form of 1 BTC, valued at 40.000 USD. This non-taxable income is documented under section 2. Non-taxable income from cryptocurrency and NFT trading.
Other cryptocurrency and NFT payments
Donations, gifts, stolen/hacked/fraudulent transactions, lost assets, commercial mining, and minting are reported separately. This is because the taxation for these types of transactions often varies between countries. Therefore, to accommodate these differences, these transactions are displayed separately.
On September 1, 2022, A received a gift/tip in the form of 1 BTC, valued at 40.000 USD. This gift is recorded under section 3.1 Incoming donations and gifts in the context of other cryptocurrency and NFT payments.
Section 3: Transaction list
The Transaction List is a detailed record of all transactions that have taken place over a certain period. It includes:
Amount: Refers to the quantity of units bought or sold.
Date Acquired: The date when the unit was purchased or acquired.
Date Sold: The date when the unit was sold.
Buy/Input at: Buy/Input at is the Location of the purchase or the locations of the coin at the time of sale (when using depot separation).
Holding Period in Days: The number of days between the purchase and sale of a unit.
Short/Long Type: A classification based on the holding period. Transactions are either short-term (less than one year) or long-term (more than one year).
Cost Basis in USD: The original cost or value of the unit, stated in USD.
Proceeds in USD: The amount received from the sale of the unit, expressed in USD.
Gain/Loss in USD: The financial gain or loss from the sale, calculated as the difference between the proceeds and cost basis.