Declare crypto on income tax? (2021)

It’s time to file your tax return. You may have made money this year through cryptocurrencies. You can also quickly wonder if you are on cryptocurrency income tax must indicate. After all, crypto is anonymous, so why should you?

In this article, we explain you about income tax and cryptocurrencies. That way, you know exactly what to do when filling out the tax return for the past year.

Look quickly

Do you need to declare cryptocurrencies in income tax?

We can give you an answer right away. It is mandatory to report cryptocurrencies to the tax authorities. It’s money, after all, and it can be very valuable. You must pay tax on all valuables you have earned in one year.

Once you have earned income from a job, you also pay tax on this. This can be any job, from office worker to clerk.

People who earn their income from stocks also have to pay tax on this. Therefore, it is only logical that tax should also be paid on cryptocurrencies. However, it is all no different than with other income. Therefore, we further explain in this article how the situation is between the tax authorities and cryptocurrencies like Bitcoin, Ethereum and other Altcoins.

This is how it works with cryptocurrencies from a tax point of view

The Danish Tax Agency distinguishes between owning cryptocurrencies or actively trading with them. Therefore, we divide it into two different parts.

Owning cryptocurrencies

When you own cryptocurrencies (private), they belong to box 3 of the income tax. Within box 3, enter the cryptocurrency in the ‘other assets’ category.

Here you enter the value of the cryptocurrency on 1 January in the declaration year. The rate of the crypto exchange you use applies here, as each platform may specify a different rate.

However, you should only list them in box 3 if you already had the cryptocurrency on January 1 of the tax year. If you bought a cryptocurrency after 1 January, do not state this on your income tax in box 3.

Let’s make it a little clearer by giving an example. Suppose you bought Bitcoin worth $ 9,000 in August 2019. On January 1, 2020, the value of this number of Bitcoins increased to € 10,500, which means that you enter this number on the tax return for the year 2020.

Active possession of cryptocurrencies

It may also be the case that you are much more active with cryptocurrencies. In that case, there is a good chance that this will have to be entered in box 1 of the tax return. When you enter them in box 1, you will have to pay 49.5% (in 2020) tax on the positive result in that year if you have them in private possession.

If the cryptocurrency is in the possession of a BV, a tax of 16.5% or 25% (in 2020) of the positive result must be paid. It depends on the profit you made that year.

It is not possible to deduct losses incurred by cryptocurrencies. This is because, according to the Danish Tax Agency, cryptocurrencies have a very speculative character.

What if they pay your salary in cryptocurrency?

There are lots of people who receive their salary in cryptocurrencies. Maybe that’s the case for you too. The tax authorities state that the employer must convert the crypto into euros when you receive it. According to the tax authorities, there is payment of salary in kind.

Do you have to pay taxes if you mine crypto?

It says on Skat’s website that the income from mining is often difficult to state. There are also many costs associated with mining cryptocurrencies. For example, consider power and hardware costs.

So you make money by extracting crypto? Then do not state this on the tax return.

But cryptocurrencies are anonymous, right?

It is true. Often, cryptocurrencies are completely anonymous. This is because cryptocurrencies run on blockchain. You’re not a blockchain person, but a public key. This is a piece of code that guarantees your identity. The private key ensures that no one can steal your identity.

You may already be wondering why you would report cryptocurrencies to the IRS. They would not immediately find out that you have made money trading cryptocurrency. That’s all right, but it can get very bad in the future if you do not declare crypto with your income tax.

When you want to use cryptocurrency, you often need to sell it first and transfer it to your bank account. Doing it a few times will not arouse suspicion. Even when it remains in low amounts, it is not noticeable. But after a while, it can start to stand out with the bank and the IRS. They then want to know why you are receiving an X amount in your account every month from a crypto exchange.

You will need to be able to account for yourself at that point. If the tax authorities subsequently find out that you have not given up the income you have earned with crypto, you may have problems. You can get a fine that way. But it’s even worse when you’re blacklisted.

It is therefore advisable to report cryptocurrencies to the IRS when you have a large income from it. Of course, it’s not nice to have to pay taxes, but you can prevent so many problems. Because once you are in trouble with the tax authorities, you do not get out of it quickly and easily.

Make Money With Cryptocurrencies

There are several ways you can make money with cryptocurrencies. Most people make money from crypto trading. That means trading in cryptocurrencies. For example, you can buy cryptocurrency at a certain price and sell it later when the value has increased. This way you get profits. Because the price of cryptocurrencies often goes up and down, you can make a lot of money in quite a short amount of time. But the opposite can also happen. Because it is also possible to lose a lot of money in a short time. These are the stories you do not hear so often.

When you earn crypto with crypto trading, you must state this on the tax return. It is a source of income and everything that has to do with your income must be disclosed. Although crypto trading is still a very new way of making money, you still have to pay tax on it. If you do not do this, you can expect a fine and penalty from the tax authorities.

It is also possible to make money with cryptocurrencies by mining. This means that you get your machine (computer or server) to work for the blockchain network. You will then check and validate transactions. Once you have done this, you can add a new block to the blockchain. This applies to the Proof of Work algorithm. There are lots of other algorithms where you can make money by mining in a different way. If you are the one adding a block to the blockchain, you will receive a reward for this.

You do not have to state money that you earn by mining, on your income tax. There are many costs associated with cryptocurrency mining. Think about the cost you pay for the energy, but also the cost you have to bear for the hardware you need.

Do I have to declare crypto if I have not bought or sold anything in that year?

Maybe you bought crypto a few years ago and you still own it now. Did you not buy or sell crypto in the year for which you are to file the declaration? Then you still need to declare the crypto you have owned. You then indicate what the value of the crypto was on January 1 of the tax year. You then also indicate the extent to which the value has increased so that the tax authorities know how more valuable your passive property has become.

The same goes for stocks. If you own shares, state the value on January 1st. You then indicate the extent to which these shares have increased in value. If you had the shares or crypto in your possession after 1 January, you do not have to tax them for the tax year in question. In that case, state them if you still have them by January 1st.

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