It’s a known fact that where money is involved, paying taxes is inevitable. Taxes on cryptocurrency are imposed by many countries worldwide. These jurisdictions introduced cryptocurrency tax laws because they want skin in the game when it comes to investing in Bitcoin and other cryptocurrencies. However, crypto tax rates depend on the particular country and the size of the profits generated by an investor. In some instances, crypto exchanges offer software that streamlines submitting annual accounts with local authorities.
Trading Crypto, Do I Have to Pay Taxes?
It’s critical to understand your country’s crypto taxes and how they affect you. But first, let's answer the question posed. Do you have to pay taxes on cryptocurrency? Yes, you must pay cryptocurrency taxes if your jurisdiction demands it. In many countries, cryptocurrencies are considered capital assets. Other examples of tax-liable assets are stocks, bonds, real estate, etc. A capital gain or loss is incurred when a capital asset is sold.
A capital gain is realized when the value of an asset surpasses the purchase value. If profit is made on an asset, it is regarded as taxable by the law and referred to as the capital gains tax.
Similar to other assets, crypto taxes are deducted on completing a transaction. If both buying and selling have taken place, a transaction is considered completed. Taxes on cryptocurrency are paid from the profit only after being sold. Gains on unrealized cryptocurrency transactions are not taxable.
To better understand what we have explained, let's paint a scenario. A US citizen named Joseph purchased Bitcoin for $25,000 in June last year. By December, Bitcoin's market value had increased, and Joseph's assets reached $27,000. After he sold his Bitcoins, Joseph realized a gain of $2,000. As a result, Joseph ought to pay capital gains tax to the Internal Revenue Service (IRS) from the $2,000 profit.
You should be aware that the amount of capital gains tax payable by an individual will vary based on the holding period. Therefore, per the US tax structure, there are two types of capital gains taxes on cryptocurrency:
- The Short Term Capital Gains Tax: This type of tax applies if you purchased and sold an asset within a year or less. Here, your Crypto tax rates are determined by your tax bracket. Simply put, you will be taxed as though it's your ordinary income.
Back to the example, we can infer that Joseph's Bitcoin tax rate will be the short-term capital tax since the holding, buying, and selling period was less than one year. To calculate his tax rate, let’s assume he makes $40,000 annually. According to the federal tax law in the US, Joseph’s average tax bracket will fall in the 12% tax rate. Adding the $2,000 profit he made from his crypto with his annual income of $40,000. The total becomes $42,000 and his new tax rate would be 22%.
- The Long Term Capital Gains Tax: This tax principle applies if you bought an asset and the holding period lasts up to 366 days or more. Taxes on long-term capital gains are more favorable since they encourage people to hold on to assets for longer time frames.
To further explain this, let's paint a scenario. Jaclyn is a single lady with a total earning of $10,000. She bought 0.5 BTC and made a profit of $1,000 after holding for a two-year period.
Assuming the holding period was less than a year, she would have paid the 12% tax on her profit which amounts to $120. However, because she held her crypto asset for more than a year, the long-term capital tax applies. As a result, she would now pay a 0% tax where her income falls within the long-term capital gains tax bracket.
Taxable and Non-taxable Events
We have established that crypto taxes do not take effect until the cryptocurrency has been sold. However, there are other events apart from buying and selling that involve the exchange. Some of these events are taxable, while the rest are not.
According to Investopedia, "a taxable event is any action or transaction that may result in taxes owed to the government." Therefore, a taxable event will always lead to a capital gain or loss report.
In the IRS virtual currency guidance released in 2014, the following are considered taxable events for cryptocurrency:
- Exchanging crypto into fiat currency
- Paying for goods and services with crypto
- Exchange from crypto to crypto
- Earning crypto as an income or a reward. This could be by staking, mining crypto, interest from lending, airdropping, etc.
How to Calculate Capital Gain/Loss in a Taxable Event
To calculate your capital gain or loss, use this formula.
Capital Gain/Loss = Fair Market Value - Cost Basis
- Fair Market Value is the price an asset will sell for on the market at a given time. It is usually valued in USD.
- Cost Basis is the original amount used to purchase the crypto asset. The cost basis also considers charges or fees that were incurred during the purchase.
For instance, if Pam bought 1 BTC at $58,000 in January 2021, her Cost Basis was $58,000. If she then sold the Bitcoin in January 2022 at a fair market value of $37,500, to calculate her capital gain/loss;
Capital Gain/Loss = Fair Market Value ($37,500) - Cost Basis ($58,000)= $20,500
From the above, Pam has incurred a capital loss. According to cryptocurrency tax laws, if this loss is reported, she will not be taxed for it. In the future, if Pam makes capital gains, her previous loss could offset her Bitcoin tax rate.
In contrast, events that are non-taxable include;
- Buying and holding crypto.
- Transfering crypto across one’s own wallets.
- Crypto gifts & inherited assets.
- Donating crypto to a tax-exempt organization
Since selling has not taken place in the above cases, they are not taxable events.
Crypto Regulations Around the World
Many countries worldwide still find it hard to pave the way for cryptocurrencies, even after more than a decade since their introduction. Probably the most significant reasons behind this are their volatility and decentralization. In some countries, crypto has been regulated by law while in other places they've simply banned its usage altogether or didn't care much about the impact this innovation could have.
Listed below are some countries that have regulated cryptocurrency.
The United Kingdom: The UK law does not include specific legislation about cryptocurrencies. However, the sector is currently supervised by the Financial Conduct Authority (FCA), which gives licences to crypto businesses and exchanges. In the UK, crypto is considered an asset rather than a digital currency. Taxes on cryptocurrency are treated under Her Majesty's Revenue and Customs (HMRC).
The crypto tax rate depends on the specific crypto activity and the individual carrying out the transaction. Also, crypto-based firms must comply with counter-terrorism financing (CTF) and anti-money laundering (AML) initiatives.
Singapore: In Singapore, the Payment Services Act, 2020 governs cryptocurrency tax laws and the relevant entities are regulated by the Monetary Authority of Singapore (MAS). Businesses that operate cryptocurrency exchanges must get a license. Furthermore, an entity seeking to buy, sell, hold, or transfer cryptocurrencies in Singapore must apply for approval and follow AML and CTF rules.
The United States of America: Crypto regulations in the US differ from one state to another. Some states have laws regulating them, while some others don't. US capital gains taxes apply to cryptocurrency because it is regarded as property. According to the IRS guide, taxes on crypto are charged at the same rate as federal taxes. A short-term capital gain is taxed at 10-37%, and a long-term capital gain is taxed at 0-20%.
Canada: In Canada, cryptocurrencies are not legal tender but can purchase goods and services online and in certain stores. The Canada Revenue Agency administers taxes on cryptocurrency transactions. It is required that all cryptocurrency exchanges register with the Financial Transactions and Reports Analysis Center (FinTRAC).
Cryptocurrencies are taxed either as capital gains or as income, depending on the nature of the trade. For business income, 100% of the profit is taxed, while for capital gains, only 50% of the profit is taxed.
Australia: Bitcoin and other virtual currencies are considered assets in Australia. Therefore, they are liable to capital gains tax. In Australia, businesses that conduct Bitcoin transactions are legally obligated to keep accurate records of these transactions. Crypto-related firms are required to pay income taxes on their earnings. Mining and exchanging crypto is also taxable in the country.
Tax exemplification is possible in Australia, but only if Bitcoin is used to pay for personal goods or services and if the transaction value does not exceed AUD 10,000 (Australian Dollars).
Pro Crypto-Friendly Nations
Tax liability can be a nightmare for many crypto traders and investors. This is because they often have to pay vast amounts of money to the government as crypto taxes. To find a way around this, many investors and traders move to tax-free countries to maximize their profits.
We have listed below some tax-free countries and those with the best crypto tax laws that charge little or nothing as taxes on crypto.
Belarus: Belarus is officially a tax-free country. In 2018, they issued a law that legalized all crypto-related activities and abolished crypto taxes until 2023, when the law will be reviewed. In Belarus, crypto is considered personal and is not subject to any cryptocurrency tax laws. With this in place, Belarus aims to boost the country's digital economy.
Malaysia: In Malaysia, crypto is not taxed because it does not qualify for the capital gains tax. The law in Malaysia does not recognize digital currencies as assets or legal tenders. These tax laws apply only to individuals. Businesses involved with crypto are subject to the country's income tax.
Profits made from actively trading crypto are considered revenue and income tax-deductible. A guideline released in 2018 by the Malaysian Tax department gives a comprehensive breakdown of the crypto taxes.
Malta: Malta provides has been trying to provide a friendly environment for cryptocurrency exchanges and blockchain operators. Investments in Bitcoin and other assets held long term are not subject to capital gains taxes. Business income tax on crypto traders, however, is 35%. Nonetheless, Malta provides structuring options that can reduce the tax to anywhere between zero and five percent.
Portugal: Portugal has one of the best crypto tax regimes in the world. Since 2018, the proceeds from the sale of cryptocurrencies by an individual have been exempt from taxation. In addition, cryptocurrency trading, which was typically taxed at 28%, is not taxed as investment income. However, businesses that accept digital currencies as payment for goods and services are expected to pay income tax.
Switzerland: Switzerland is among the countries with a friendly crypto tax rate. Cryptocurrency profits made by a qualified individual through investing and trading are tax-exempt capital gains. However, crypto taxes apply to income from professional trading, mining, and businesses.
Planning Your Crypto Taxes
Cryptocurrency tax laws around the world differ by location. Some crypto tax rates are friendlier than others. Cryptocurrency becomes taxable when used as a medium of exchange. It is essential to know the tax situation in your country and how it affects you to avoid defaulting on your tax payment.
Calculating taxes may seem overwhelming for newbie traders and investors, as many exchanges do not provide a tax form on their platform.
Investors who carry out minimal transactions can easily track their taxes using crypto-focused tax software programs. They help to determine the cost basis and the capital gains or losses.
However, traders who carry out multiple transactions that they can not track may need the help of a Certified Public Accountant (CPA) to plan their taxes. If you are confused or run into any problems, seek the help of seasoned professionals who will put you through.
*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.