Knowing the potential tax implications of buying and selling cryptocurrency is a crucial component of your cryptocurrency investment strategy. Consider recording your gains and losses, reporting accurately, and paying taxes, as an essential part of investing in cryptocurrency.
Are Gains from Cryptocurrency Taxable?
Yes, gains from cryptocurrency are taxable. Just like with other forms of ownership, such as stocks, bonds, and real estate, you will realise gains and losses from cryptocurrency investments when you sell, exchange, or otherwise dispose of the asset. And when you recognise profits from selling or dumping your crypto, you must pay taxes on the gain.
Basically, if you receive more value than you invested in your crypto, you create a tax liability for yourself. For instance, if you bought $1,000 worth of crypto and sold it for $1,500, you should report the $500 gain and pay taxes on it.
Cryptocurrency is a digital currency that uses cryptography for security and is generally considered property, as it is governed by the same tax principles that apply to “Property”. So, whenever there is a taxable event with regard to your crypto investments, it is your responsibility to report it in your taxes.
In the US, the Internal Revenue Service (IRS) has issued guidance on how it should be treated for tax purposes. The IRS has also said that cryptocurrency should be reported on Form 1040, Schedule D.
The HMRC, which is responsible for collecting taxes in the UK, recognises that most individuals hold cryptocurrency as personal investments, and they will pay capital gains tax when they dispose of cryptocurrency.
Crypto Taxation Events
Cryptocurrencies are a relatively new asset class, and as such, they are not subject to the same taxes as traditional investments. Capital gains tax is the most common type of tax applied to cryptocurrency investments, and it is typically charged at a rate of 15-20%.
For example, you may owe crypto taxes if you live in the United States and have made money from buying, selling, or trading cryptocurrency. The amount you owe will depend on your income and the type of cryptocurrency transactions you have made.
Now every crypto transaction is taxable. For instance, if you just bought cryptocurrency and held it in your wallet, you have no sort of tax reporting requirements since you still haven’t realised a gain or loss from your investment. Even transferring crypto between the accounts or wallets you own isn’t a taxable event.
Moreover, instead of selling your cryptocurrency and taking capital gains, you could give your cryptocurrency to someone and get a tax deduction in return for your generosity. Donating your crypto to a qualified tax-exempt charity or non-profit also reduces your tax bill aggressively.
Gifting can also help you avoid paying taxes on gains. In the US, you can fit up to $15k per recipient every year (higher in the case of spouses) without paying any taxes, and if you receive crypto as a gift, you are not likely to incur a tax until you sell or stake it either.
Taxable Crypto Gains
Now, if you sell your crypto for fiat, you owe taxes. Even if you convert one crypto to another, you have to pay taxes if you sold your crypto for more than you paid. You will also have to shell out tax payments even when you use crypto to buy goods and services.
However, countries like Singapore do not have a capital gain tax regime for crypto, making it one of the tax-free crypto countries that regards cryptocurrency as intangible property.
Taxable as Income
Cryptocurrency is also subject to ordinary income taxes. This means that if you receive crypto as payment for goods or services, the value of the cryptocurrency is taxable as income. For example, if you are paid in bitcoin for freelance work, the value of the bitcoin is taxable as income.
In the UK, if the individual mines cryptocurrency or receives an airdrop, these gains will be taxed on the income, and the taxpayer will need to pay a National Insurance contribution.
Meanwhile, in the US, in addition to purchases, sales, and transactions, if you receive cryptocurrencies, whether from work, mining, staking, airdrops, operating a node, or interest on the lending activity, you are liable to pay income taxes on the dollar value of the crypto earned when you received it.
Types of Capital Gains Tax
When it comes to capital gains taxes, they can be either long-term or short-term. Depending on the time period you’ve held your crypto affects how much tax you’ll end up owing.
Short-term Capital Gains
If you own crypto for a year or less before spending or selling it, any gains are short-term capital gains. Short-term gains are taxed at your ordinary income rate, which is usually a higher, less-favourable rate.
The tax rate on short capital gains is up to 37% in the US, 15% to 33% in Canada, and 10% to 20% in the UK, but it can go up to 45%.
Holding crypto for less than a year in Germany makes you liable to pay at a rate similar to the regular income tax rate — up to 45% plus the 5.5% Solidarity Tax unless the profit is less than €600.
Long-term Capital Gains
Selling crypto that you had held for over a year would count as long-term capital gain, and you would pay the lower crypto tax rate. So, before you sell or trade, it is worth reviewing your holdings to see what qualifies as a long-term gain, as opposed to what would be treated as short-term capital gains, to try and help reduce your cryptocurrency tax liability.
In the US, the rate varies based on your income, ranging from 0% to 15%, and can go up to 20%.
In Australia, an investor is eligible for the 50% capital gains tax discount if they hold a crypto asset for over 12 months. Individuals in Germany, meanwhile, do not have to pay capital gains tax on crypto held for more than a year.
Now, if you suffered any losses on your cryptocurrency investments, you can use them to offset your capital gains and income to lower your total tax bill in a particular year.
For instance, in the US, any losses from sales can be used to offset income tax up to $3,000 in total. You can use these losses to offset other capital gains besides crypto, such as stocks.
How to Calculate Crypto Tax?
In general, cryptocurrency taxes are calculated the same way as taxes on any other type of investment.
The difference between your cost basis — the original price paid for the crypto asset, plus any costs associated with acquiring it (such as commissions and fees) — and how much you earned from selling it is your capital gain or capital loss, which you will report on your tax return.
You have a capital loss if the sale price is lower than the cost basis. And if the sale price is higher than the cost basis, you have a capital gain.
Gathering the information needed to report transactions on your tax return should be relatively straightforward if all your crypto transactions happen on one exchange. Synchronising transaction histories across all exchanges into one cryptocurrency tax calculator is a way to track all your data across years, using automated formatting, in an organised manner.
It’s important to keep accurate records of all crypto transactions, so keep track of things like the date of purchase, the sale price, and the cost basis for each asset sold.
Taxes, in general, are complicated, and when crypto is involved in the mix, it can get even more cumbersome. Moreover, as the crypto industry evolves, authorities worldwide are also modifying its tax code, making it harder to keep track.
Remember that neglecting to report your cryptocurrency gains, losses, and income on your taxes is considered tax fraud and can lead to penalties as well as criminal prosecution with a prison sentence.
So you can either use crypto tax calculators or speak with a tax professional to calculate your crypto taxes.