Tax reporting enables you to keep a record of your crypto activities and also verifies that you are meeting the reporting standards imposed by your governmental authorities.
Founded in 2017, Binance is among the most reliable and popular cryptocurrency exchanges and trading platforms in the world. Apart from allowing users to purchase, exchange and trade, Binance is also meeting the tax needs of its users with the Binance Tax Tool Functionality. You can now have all of your transactions automatically recorded and accounted for.
This article will answer all the questions you have regarding Binance taxes and Binance tax reporting, that’ll help you stay on top of your crypto taxes!
Advantages Of Using Binance
Packed with a lot of advanced features, such as buying, exchanging, and trading a range of cryptocurrencies, Binance also covers one of the most essential aspects of cryptocurrency- tax reporting.
You can keep track of your bitcoin activity using the Binance Tax Reporting Tool. You may use the API to produce a report and utilize it to confirm that you are complying with all the tax criteria.
What Does The Tax Reporting Tool Mean For You?
- You can transfer the records of capital gains and losses as well as your transaction history on Binance to third-party tax vendor tools
- You can get a real-time overview of your local tax liabilities by integrating third party tax vendor tools
Here’s how the Binance Tax Reporting tool will benefit you:
- When seeking your transaction history, safeguard and govern your financial data
- Get detailed information on capital gains and losses
- Details of local tax liabilities
- Easy and quick tax reporting
- Integrates with tax reporting software, like ZenLedger, and pulls transaction histories for seamless tax calculation
When Do I Have to Pay Taxes?
Since the IRS has considered crypto as property in the IRS Notice published in 2014, there are several scenarios where you have to pay taxes on the usage of cryptocurrency. Here are the scenarios:
Selling Your Crypto for Cash
The most commonly known taxable event is selling cryptocurrency. If you exchange a token for fiat money such as the USD, first, you have to know the cost basis of the coin you are selling.
For instance, if you bought Bitcoin for $1,000 and sold it three months later for $3,000, you are liable to pay short-term capital gains tax on the $2,000. Similarly, if you sold it a year later, you’ll have to pay long-term capital gains tax. If you incurred capital losses with the same transaction, you are entitled to a reduction in your tax bill.
Buying Goods and Services with Crypto
Using digital assets to buy any kind of goods or services is considered as a taxable event. It gets a little tricky when you buy goods or services using fractions of a virtual coin. First, you have to determine which virtual coin was utilized to purchase any product, and you have to keep a record of the coin’s price basis and its value at the time of the transaction.
Moreover, it only works when the transactions involve a coin sold at a profit. Let’s simplify it a little bit with an example. Let’s say you bought Bitcoin for $5,000 and after a while, you buy a pair of jeans and pay it with Bitcoin but at the time of buying the jeans, the value of Bitcoin is $4,000. This transaction cannot be declared as a loss.
Exchanging one virtual coin for another also exposes an investor/trader to taxes. If you buy Bitcoin with Ethereum, you are effectively selling Ethereum and you’ll have to pay taxes on the difference in Ethereum’s price between when you bought it and when you used to buy Bitcoin.
Receiving Crypto as Income
If you receive crypto tokens as payment for goods or services, you have to report them as business income. Similarly, if you earn a salary in virtual coins, it will be deemed as personal income and will be taxed.
Mining, Staking Crypto or Receiving an Airdrop
If you mine/stake cryptocurrency, or received it as an airdrop, it is considered as taxable income. But, the rules for mining are a bit different. Miners verify transactions and add them to the blockchain network. For their effort in terms of computational power, they are rewarded. Their reward is taxable but they are eligible to deduct expenses such as computer hardware and electricity that went into the mining operations.
Calculation Of Binance Taxes
Binance supports buying and trading of cryptocurrencies, and both of these are considered taxable events in the United States. A taxable event is an event that has tax implications of some sort.
Purchasing & Selling Cryptocurrencies
To calculate taxes, the first step is to determine the capital loss or gain of your purchased and sold cryptocurrencies. The formula for calculating capital gains or losses is:
Fair market value (FMV) - Cost basis = Capital gains or loss
So what exactly is fair market value and cost basis?
Cost Basis: The cost basis is the amount that you spent to acquire an asset, including the purchase price, transaction fees, brokerage commissions, and any other relevant costs.
Fair Market Value: The fair market value is essentially the dollar value that the market is willing to pay for a given cryptocurrency at a specific time.
The price at which an item would sell on the open market is known as fair market value (FMV), whereas cost basis is the original price of the asset, as well as any other fees involved.
An example. Suppose you bought BTC for $6,000 (including fees) in 2019, so your cost basis would be $6,000. Within 2 months of making that transaction, you sold this BTC for $9,000 (including fees) for an equivalent amount of ETH. Now if you subtract your cost basis of $6,000 from the proceeds of $9,000, you’ll get your gains, which in this case is $3,000.
In the US, your capital gains taxes will depend on your income as well as the holding period of the assets. So, you have to pay short-term capital gains taxes on your gains of $3,000 ($9,000 - $6,000).
Now suppose, after two years, that is, in 2021, you sold the $9,000 worth of ETH for $15,000 (including fees). Similarly, you’ll have to pay long-term capital gains taxes on your gain of $6,000 ($15,000 - $9,000).
Calculating your trading taxes is not as simple as calculating taxes on purchases and sales of crypto. Let us consider the given data as your trading history:
Since trading is considered a taxable event, you have to figure out your capital gains or losses. The difference between the fair market value ($800) and the cost basis is your capital gain. However, which transaction should we use as the cost basis?
Accountants compute the cost basis in two different methods:
- First-in, first-out (FIFO)
- Last-in, first-out (LIFO)
Using FIFO, the cost basis in the given example would be $300. So, the capital gain would be:
$800 (fair market value) - $300 (cost basis) = $500 (capital gains)
Using LIFO, the cost basis would be $600. So, the capital gain would be:
$800 (fair market value) - $600 (cost basis) = $200 (capital gains)
But this indeed is a complicated process. So the question now is how to get tax info from Binance?
Binance Taxes: How To Get Tax Info From Binance
Binance Tax Tool Functionality is available only to Binance users. This tool allows you to generate a record of all your transactions for 1 or more financial years.
Here is a step by step procedure on how to get your tax info from Binance:
- Firstly, click on [Account] - [API Management] after logging into your Binance account.
- Now choose [Create Tax Report API].
- For your Tax Report, you'll receive a unique API and Secret Key. You can use a ZenLedger to combine your tax report. For this, you have to copy the key.
- If you wish to combine your tax report with a tax reporting software (such as ZenLedger), copy the keys.
- Choose any crypto tax reporting software. We recommend using ZenLedger, a reliable and secure software that’ll help you report taxes without breaking a sweat.
- Click on the [Add Wallet] option under [Wallets] and choose [Binance].
- Click on [Setup auto-sync] once you've given your wallet a name.
- A Setup Binance API window will appear. Use the Binance Tax Report API's API keys and Secret Key to log in. Then select the [Secure Import] option from the drop-down menu.
- The API keys will retrieve a history of your transactions and maintain your data up to date automatically. Your Binance taxes records will be ready in a few minutes.
There are a few things that you must take into account here:
- There is a limit of one Tax Report API per user
- You must choose the third-party tax reporting platform based on your own or your tax advisor's decisions
Reporting Binance Taxes
Now that we’ve dealt with Binance taxes info, the next relevant question that needs to be answered is: How to pay taxes on Binance?
For certain transactions in the United States, a 1099-K must be submitted with the Internal Revenue Service. Apart from that, Form 1040, generally known as the US Individual Income Tax Return, should be required.
A new question- "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” is now being added in the tax form of the IRS.
For this, you’ll have to mention on your tax form that you have traded or received crypto using your Binance account. The Binance taxes document will provide you with additional transaction history information and help you stay on track.
Does Binance Report to Tax Authorities?
Binance, the world’s largest crypto exchange is now prompting its users to finish their know your customer (KYC) process to enhance security. If the exchange does not comply, it can have compliance ramifications for millions of users.
By asking its users to follow KYC and anti-money laundering (AML) verification protocol and providing their government-issued IDs, Binance is signaling that the users’ activities are going to be reported to the Internal Revenue Services (IRS).
According to market experts, compliance with AML/KYC regulations means Binance will share the user information with the US tax authorities. So, if you are a Binance user, complete the AML/KYC requirements, file your Binance tax report to remain tax compliant, and avoid potential audits.
AML and KYC are tightly linked together. All business and financial institutions are required to comply with AML regulations and are subjected to Bank Secrecy Act regulations, which broadly represent regulations, laws, and policies designed to stop illegal money-making or moving activities.
When a user goes through the KYC process, they have to verify their identities and provide their income sources. Also, tax authorities monitor their activities on a regular basis.
Binance believes that complying with AML/KYC regulations will protect its users and help the authorities fight financial crime. The biggest implication is that Binance will share wallet information and trading data with the IRS, which could trigger primal investigations and civil audits. So, does Binance report to tax authorities, the answer is a resounding “yes.”
Does Binance Report to HMRC?
The HMRC (Her Majesty’s Revenue and Customs) is the UK’s equivalent to the IRS. Currently, the HMRC has to state that they have notified Binance to share customer data. However, they have requested customer information from Coinbase, eToro, and CEX.io.
One of the reasons that the HMRC has not asked Binance for customer data is that Binance is already sharing customer information with the HMRC. That being said, if you are living in the UK and using Binance as your trading platform, you should always presume that HMRC will find out about your trades. Therefore, always report your transactions accurately to the HMRC. If you don’t report your transactions properly, you could get in trouble with the tax authorities. So, does Binance report to HMRC? It has not been stated publicly, but assume that HMRC knows about your transactions.
Using ZenLedger As A Tax Reporting Tool
ZenLedger is a popular and reliable crypto tax reporting software. Let’s understand how you can use ZenLedger to calculate taxes.
Suppose you have the Binance Tax Report API of your Binance tax documents. Simply follow the steps given below:
- Login to your ZenLedger account.
- Click on the [Import] option and choose [Add Account].
- Choose [Binance] from the list of exchanges given in the exchange section. On the right hand side, you’ll see import instructions (if any) provided by ZenLedger regarding the API that you’ll import.
- Click on [Next Step] and then tap on [Tax Calculation].
If you want to verify the file you have imported:
- Go to the [Import] tab.
- Click on [View Imported History].
In order to calculate the taxes:
- Go to the [Taxes] tab and select the corresponding year of taxes you want to calculate from a dropdown menu.
- Choose the accounting method from the dropdown menu. ZenLedger allows you to choose from the three major accounting methods- FIFO, LIFO, and HIFO. Another great feature of ZenLedger is that it allows you to add a tax professional while you’re calculating taxes on this tab.
The Bottom Line
And that’s all you need to know about Binance taxes and Binance tax reporting. Even if you’re just starting off, all this information may feel a little overwhelming, but that’s alright! The good news, however, is that if you get into the habit of keeping track of your operations, you'll be on top of your taxes in no time.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.