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How to pay tax on cryptocurrency
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If you're investing in or trading cryptocurrency, at some point you're going to need to address the issue of tax. Rules and regulations different from country to country and it can be confusing trying to figure out where to start.
With that in mind, we've compiled some tips to consider when it comes time to figure out how to pay tax on cryptocurrency.
To FIFO or LIFO?
FIFO and LIFO are two common accounting methods used to determine taxable income on virtual currencies.
- FIFO: First in, first out. Assets bought first are sold first.
- LIFO: Last in, first first. Assets bought last are sold first.
But which should you choose?
Well, FIFO is the most popular and the default method as it can help reduce risk of underpayment. This is particularly relevant if you're holding your assets long term.
If your gains aren't long term, though, you may end up with a higher tax bill.
In the case of short-term gains, LIFO may be a more prudent choice.
Get a good accountant
For many cryptocurrency traders, it's considered good practice to leave the bulk of the heavy lifting with filing taxes to accountants who have an understanding of the rules that apply to cryptocurrency.
If you're not sure what you're doing, an accountant will be able to help, reducing the risk of making mistakes and incurring penalties.
There are even companies out there that can help get your transactions records from cryptocurrency exchanges and then work out your taxes for you that way.
Keep good records
Whatever you do, you should make a point to periodically export your transaction history and keep a record of all your trades and investments. You can do this easily on Liquid (more info at the end of this article).
Keeping records can be difficult if you use multiple exchanges and wallets, but you'll need to keep track in order to be able to pay your taxes.
In it for the long run
Cryptocurrencies can attract less taxes when owned for longer periods of time. Some traders adopt a strategy of long-term investment as in countries like the US, capital gains taxes on investments held for more than a year are lower than those held for shorter periods of time.
How Liquid can help
On Liquid, you can quickly and easily export your transaction history from the last three months.
You should therefore consider exporting your history at regular intervals throughout the year. These records will help you when it comes to working out your taxes.
Once you have your transaction records, you can opt to file your own taxes, by using the FIFO or LIFO method to minimize your tax obligations. Alternately, you can hire an accountant to help.
To access your transaction records, navigate to the Wallets tab at the top right and choose Transactions to open your transaction history window.
Scrolling down reveals a menu titled Overview Report. This is where you can download your transaction history.
Click to send your report via email and within a few minutes, a CSV file will arrive in your inbox.
Meeting tax obligations is made convenient and easy through Liquid.
And don't forget, if you're trading on Liquid, you can exchange your crypto to fiat at any time and withdraw your funds to your bank account.
We hope this article has given you some tips when it comes to learning how to pay tax on cryptocurrency. Trade safely!