Mainstream adoption of cryptocurrencies is well underway. In recent months, the on-going pandemic has highlighted the benefits of digital currencies around the world, resulting in a massive resurgence of the cryptocurrency market. Central banks are developing digital currencies, major corporations are converting financial reserves into Bitcoin, and FinTech firms are developing platforms supporting such assets.
Despite these positive developments, there are a couple of areas which are often noted as lacking – holding back cryptocurrencies from truly taking flight.
- Merchant terminals – The ability to make simple purchases with digital currencies
- Custodial services – The ability to safely store digital assets, without the need to be technologically savvy
Each of these is often noted as a major hurdle needed to be cleared for mainstream adoption to occur – and for good reason, as both are real-life issues that would be encountered by everyday users.
One area often forgotten is the need for simple and effective tax solutions. Buying and selling cryptocurrencies is not a fun activity free of any tax burden. Typically, governments require capital gains to be calculated on each and every trade made, along with a variety of other requirements.
Unfortunately, many investors are completely unaware of the tax implications associated with trading cryptocurrencies. Further compounding this, is a simple lack of options for making the process simple. Yes, there are third party companies that are attempting to do just this, but their lack of integration with major trading platforms results in these services remaining unknown to many.
Day of Reckoning
For many of those willing to look past the dearth of user-friendly solutions, and continuing to trade anyways, a day of reckoning is coming. When that day happens, there will either be those that have reported their activity, and float – and there will be those that failed to do so, and sink.
Every country around the world has its own set of rules and guidelines surrounding the reporting requirements of cryptocurrencies. Although early industry participants may have skirted around reporting activity due to lax oversight, this is rapidly changing. Entities such as the Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA), have made it clear that they are watching, and expect appropriate reporting.
The issue of taxes and cryptocurrencies will hopefully be a thing of the past in the coming years, though, as popular platforms continue to delve into the industry. The following are three examples of well-known companies involved with FinTech, their forays into cryptocurrencies, and what they are doing about taxes – Two with a plan, and one a wild card.
The latest FinTech firm to jump into cryptocurrencies is one of the biggest around – PayPal. While support is not expected to launch for another few weeks/months, depending on one’s location, investors anticipating using the service are already wondering what tax solution PayPal will offer.
PayPal has not indicated what its plans are for minimizing tax reporting burdens. With all eyes on PayPal (regulators and users alike), this may be the case for now, but presumably not forever. The question is, will PayPal develop its own solution? Will it acquire a company such as SimpleTax? Or will it partner and integrate the services of another like TaxBit?
A relative newcomer to cryptocurrencies, WealthSimple announced its crypto platform in late 2020. This platform, which facilitates the buying and selling of various top-assets (Bitcoin, Ethereum, etc.), holds great potential to introduce cryptocurrencies to a diverse group of clientele.
Whether intentional or not, WealthSimple is fortunate to have made a strategic move in 2018, which will benefit its newly formed crypto platform – the purchase of SimpleTax. This popular tax-oriented platform brings simplicity to filing one's taxes. Furthermore, it has for years now, supported users which partake in cryptocurrency trading. As a result, WealthSimple is primed and ready to support its new platform with a much needed crypto-focused tax solution.
While WealthSimple provides access to a broad range of financial capabilities, including TFSAs/RRSPs/etc., Gemini has a more focused approach on cryptocurrencies.
The increasingly popular platform has just announced that it will be integrating software by TaxBit, designed specifically for reporting crypto trading activity. One highlight of this service, is the ability for investors to, not only generate year-end reports, but to track the effect of their trading on taxes in real-time.
Tyler Winklevoss, CEO of Gemini, stated, “TaxBit’s software automates the calculations required for crypto tax reporting, helping reduce the pain point of crypto taxes for our users. Investors will also be able to see real-time tax implications of any trades they make on Gemini.”
Maximalist by Choice?
A term often used when discussing Bitcoin investing, is the ‘maximalist’. This refers to investors that believe in the efficacy of Bitcoin above all else, and maximize their holdings in this single asset, rather than diversifying among various alt-coins.
Keeping in mind the issue surrounding taxes discussed here today, it begs the question – are all investors Bitcoin maximalists by choice? Or are they simply deterred by onerous tax requirements, and a lack of options to overcome this?
Hopefully, sooner than later, this issue will become a moot point, and companies such as WealthSimple, Gemini, PayPal, and others will continue to satisfy the industry need.
The takeaway from all this is simple – Learn your local tax requirements, and adhere to them. Don’t be caught scrambling, trying to make sense of years-worth of unreported activity, when the IRS/CRA/etc. comes calling.