For tax implication purposes, crypto staking and mining taxes are considered as income tax. Therefore, if you have received rewards as a result of staking cryptocurrency or mined it then the IRS requires you to treat it as regular income with respect to the cryptocurrency’s fair market value at the date of receipt.
Unlike crypto sales, proceeds from mining are considered as income rather than capital gains or capital losses. The same is applicable in the case of crypto staking as well.
Calculating Crypto Mining and Staking Taxes
Crypto tax calculation software applications are ideal for calculating crypto mining and staking taxes. This is mainly because it is essential to be aware of the fair market value of each and every instance where the trader has received staking or mining rewards.
A crypto tax calculation software application can be of help in case you do not have the fair market value for all such instances. These software applications also allow the trader to club all such transactions under ‘income’ and calculate the appropriate ‘income tax’ amount that they attract.
It must be noted that once the mined or staked cryptocurrency is sold or traded it will attract capital gains (or loss) tax implications and they need to be reported and filed accordingly. The following example will explain the different tax implications on crypto mining and staking:
- 1 Bitcoin mined on 1st February 2018 worth $6000
- Sold on 1st March 2018 for S6500
Considering this example, $6000 must be reported as income and $500 ($6500-$6000) must be reported as capital gains.
The income tax will be calculated depending on your tax bracket and whether the capital gain is long term or short term. In this case, the capital gain was short term. In case you have incurred a loss, it will be deducted from the overall taxable income with the applicable threshold.
Crypto Margin Trading and Fees
What is Crypto Margin Trading?
To put it in simple words, cryptocurrency margin trading is the process of trading crypto by using funds that are borrowed. Typically, the trading capital is borrowed at high rates of interest from the crypto exchange in order to access increased leverage. While it offers the borrower an opportunity to increase profits if markets improve, it also carries a certain risk of loss in case the market condition deteriorates.
How Does it vary from Regular Trading?
Regular cryptocurrency trading involves buying and selling crypto using own funds whereas, in margin trading, the funds are borrowed. It increases the user’s buying potential and they can have much higher access to any future profits. Also, the funds are borrowed against the existing funds in your trading account.
These increased funds give you ‘Leverage’ in terms of increased buying power. Different platforms define different thresholds for leverage that are usually expressed in the ratio of your existing trading account funds.
Benefits and Risks of Margin Trading
The increased profit potential is the main benefit of the margin trading of cryptocurrency. However, in order to realize such gains, the market must move in line with the user’s expectations.
On the other hand, if the market moves in the direction that is opposite of what you had predicted, then your losses will also magnify accordingly.
Crypto Margin Trading Tax Implications
In itself, cryptocurrency margin trading does not attract any tax implications as defined by the IRS. Taxation comes into picture when you lose or earn on a particular margin trade. This is because cryptocurrency is understood as ‘property’ for taxation purposes and only gains/losses are taxable.
Tax calculation example:
- Borrowings from the exchange – $10,000 (total interest or fees = $400)
- Increase with respect to the borrowings – $15,000
- The difference upon sale – $5,000
- The profit of $5,000 will attract a capital gains tax; long term or short term, depending on whether you held the currency for a period of one year or less
- However, before you pay tax on the profit generated, you must deduct the fees or interest on the borrowings ($10,000) from the exchange. Therefore, your taxable gain amount will be
$5,000 – $400 = $4,600
Depending on how you handle your cryptocurrency the tax implications can vary. In all cases, it is essential to know the nature of gain or loss incurred as defined by the IRS as this is the first step to resolve any advanced crypto ta situations. It is also important to know the fair market value of the crypto being taken into consideration for taxation as this will form the underlying premise for calculation of the relevant taxes.