Crypto Taxes Worldwide Explained – A Complete Guide For 2023
While cryptocurrencies are becoming mainstream, countries worldwide are taking steps to improve regulatory framework within the sector. Being a new found industry, in the early days crypto had no formal investment category, however, nowadays crypto taxes are a hot topic for financial regulators. Crypto taxes vary from country to country and some jurisdictions have a lighter approach, while others like the US have introduced tighter measures and guidance in place.
In this guide, we will take a look at crypto taxes in the US and around the world to establish how much tax you might need to pay on your crypto.
What Are Crypto Taxes?
Taxes on crypto are defined as a percentage of profits that investors must provide as a compulsory contribution to a country’s revenue. A country’s financial regulator sets the rates at which assets are taxed and what transactions take place with those assets for tax to be incurred.
It can be daunting for individuals to figure out how to best calculate their cryptocurrency tax liability, and even if they are due to pay tax or have losses which result in tax deductions. Also, transactions in crypto assets can be calculated in various ways, whereby trading and selling for profits are taxable, some transactions such as gifting and charitable contributions do not have tax liability.
Below we will cover the different types of events that are taxable and non-taxable, and also the various tax categories that are applied to different forms of buying, selling and receiving cryptocurrencies.
How Do Crypto Taxes Work?
Taxes on crypto can be categorized into three main classes: Capital gains, income tax and non-taxable events. In the USA, Bitcoin and other cryptocurrencies are treated as an investment asset, similar to that of stocks, bonds and commodities. Receiving crypto as payment or making profits through crypto trading are subject to different tax obligations. The key here is to know how the crypto asset was used, and to know how profits can be determined through calculating the first or last bought crypto asset.
Do You Have To Pay Taxes on Crypto?
While the USA has introduced very stringent crypto tax guidelines and can be seen as quite strict on enforcement, some other worldwide jurisdictions have a more crypto friendly approach.
Some countries such as Belarus, Cayman Islands, Portugal, Puerto Rico and Switzerland can be considered crypto tax havens and have established themselves as very friendly towards crypto asset investments. Many crypto projects have founded their business in countries like the Cayman Islands and more recently Portugal, while Switzerland has long been labelled as Crypto Valley. For US residents Puerto Rico is notably popular, as relocation is quite attractive as the country is an unincorporated territory of the USA, however, sets its own tax law.
Country Crypto Tax Guidelines Australia Crypto classed as property, both income tax and capital gains tax are enforced depending on whether being a long-term investor or frequent trader. Earning in crypto is subject to income tax and capital gains are based on the income tax rates. Long-term capital gains for assets held for more than 1 year will be subject to a 50% discount on the income tax rate. The amounts in each income tax bracket are fixed in AUD, plus a percentage of any excess. Belarus Individual investors and crypto businesses including mining are tax exempt until 2025. All crypto activity is free from income tax and there is no capital gains due for trading and realizing profits. There is no corporate tax for businesses either, although there will be a review in 2025. Cayman Islands Cayman Islands has long been known as a tax haven for businesses even outside of crypto. The islands have no income or capital gains taxes and do not require businesses to pay any corporation tax. France Crypto assets are considered to be movable assets subject to income tax and capital gains when selling. Rates differ based on whether the person is an occasional trader or a professional. Realized gains for occasional traders are taxed up to 30%, and for professional traders the rate is considered as non-commercial profits taxed up to 45%. Mining is considered the same, being categorized as non-commercial profits taxed up to 45%, however if turnover is under €77,700 then micro-tax treatment is applied. Germany Cryptocurrencies are considered private money and classes as “other economic goods”. Cryptocurrency transactions are only subject to income tax and a capital gains tax is not applied. All crypto gains realized within 1 year are subject to income tax, however, if crypto is held for more than 1 year then there is no tax at all. The rate is the same as the country’s regular income tax which is up to 45% plus a 5.5% solidarity tax. India Cryptocurrencies are considered virtual digital assets (VDAs) and the tax rate does not differ for short or long-term gains. Profits from trading, selling and spending crypto are subject to a flat rate income tax of 30%. Japan Japan has one of the highest crypto tax rates and this ranges between 5% and 45%, however, these figures need to have a flat 10% added as Japanese residents are required to pay an inhabitants tax. There is no capital gains for short and long-term as the tax rate is considered as income tax. Non-permanent residents of Japan pay a flat rate of 20% on all income. Netherlands There is no capital gains tax on crypto when trading, selling or spending, instead The Netherlands requires people to pay tax based on fictitious gains. It is one of the only countries to tax unrealized profits, so simply holding crypto is subject to tax payment. The fictitious tax rates can be relatively low, and once calculated then applies a different mechanism called an annual wealth tax which taxes a person’s total assumed gain at 32%. Portugal Portugal is considered one of the most regulation friendly towards crypto assets. The country is completely crypto tax free and selling crypto and investment profits from trading are completely tax free. As long as you are not a business, there is no VAT or income tax on any amount of crypto earned. Puerto Rico Puerto Rico has very relaxed tax laws for cryptocurrency. The island is classed as an unincorporated US territory and therefore sets its own income tax rates. The good news is that Puerto Rico is very friendly towards crypto and there is no capital gains tax, while federal income tax rates are much lower than in the USA. Switzerland Switzerland has long been known as crypto valley as it has favorable laws for crypto taxes. Private investors do not have to pay any capital gains taxes, although crypto will need to be declared as assets and is subject to the Swiss wealth tax. Income tax does apply if you receive crypto currency as a salary or earning through activity like mining and staking. For private investors and traders there is no tax under certain conditions such as if the asset is held longer than 6 months, if trading turnover is less than 5x your holding, and if net capital gain is smaller than 50% of income. United Kingdom Crypto taxes classification in the UK is similar to the US. Crypto assets are subject to either income tax if earned, or capital gains for profits from trading/selling. There is no different rate for holding or selling short-term or long-term. Depending on the value threshold the capital gains is either 10% or 20%. Income tax rates above the personal tax free allowance of £6000 will be either 20%, 40% or 45% respectively.
Paying Tax on Crypto Capital Gains
Capital gains tax can be described simply as the tax owed on profit when you sell an asset for higher than the price it was purchased. The difference between the buying price and the selling price is the portion to be calculated, and the rate is different depending on how long you have held the asset and how much profit is actually realized. The two different classes in this respect are short term capital gains and long term capital gains. Below you can find the types of events that are taxable as capital gains.
Selling crypto to fiat currency: If a person sells their crypto assets to US Dollars or any other fiat currency in profit then it is classified as a taxable event and is due capital gains tax. The capital gain is due on the surplus between the buying price and the selling price. If the asset is sold at a loss, this is considered a capital loss and will be covered further below.
Exchanging one crypto asset to another: If a crypto asset such as Bitcoin is converted to an alt coin then this is also considered a taxable event. This is because technically in order to convert the initial asset it must be sold to acquire the other. Therefore, even trading one crypto to another will be due capital gains tax, however, the rate could be either short term or long term depending on when the first asset was bought.
Using crypto to buy goods and services: Bitcoin and other main crypto assets are being used as a form of digital payments, and since the industry has matured many payment merchants have included crypto assets as means of payment on checkout. If a person pays for any goods and services using cryptocurrencies, the IRS classes this in the same way as selling it and capital gains will be due.
Paying Tax on Crypto Income
Income tax simply put is taxes which are paid based on earnings. In the digital asset sector there are many ways to earn crypto coins from various methods of activity. These include if you are being paid in crypto, to mining, earning yields from staking and even from airdrops and reward incentives. Below we will cover the different categories to identify and better understand the events that are due for income tax in crypto.
Being paid in crypto for work or selling goods and services: If a person is remunerated for their work in any form of digital currency, then this is treated the same as if they were paid in fiat for their normal job services. This is classified as being compensated for your work and income tax will be due based upon which tax bracket the amount of earnings falls under. The same applies for if one is selling any goods and services, the income should be reported accordingly.
Staking rewards: Crypto enthusiasts can choose to stake coins which is whereby tokens are locked into smart contracts and earn reward yields. This can either be to provide liquidity or due to the nature of the tokens consensus algorithm. Staking rewards are classified under income tax and the amount due is based on the fair market value at the time of receiving. Since Ethereum moved to proof of stake, Coinbase allows customers to automatically receive staking rewards for holding the $cbETH asset, and the income earned will be liable to taxation at the time when Coinbase allows its customers to unstake.
Mining cryptocurrency: Mining crypto is treated similarly to how staking is considered and will be due income tax. Mining rewards can be irregular and the amount of coins fluctuates based on blockchain activity. Therefore, the income tax should be considered based on the price at the time the mined coins were received. Therefore, if mining Bitcoin the income tax due on coins received will be relevant to the different price of the asset, and each portion should be calculated individually.
Airdrops: New crypto projects frequently conduct airdrop campaigns as a form of marketing to gain new users in exchange for some tokens. This can be from doing small tasks or interacting with the protocol or dApp. If a person received these free tokens it is also subject to income tax and should be reported in the return when calculating crypto taxes.
Other incentives and referral rewards: Users can receive cryptocurrency rewards for referral sign ups to exchanges and also by referring their network to new protocols web3 applications. Crypto exchanges such as Binance also enable users to receive a trading fee share from their referred accounts. Many platforms also have learn sections and provide incentives for taking part in quizzes. All of the above types of rewards should be reported and are considered liable for income tax.
Tax and Crypto Losses
Crypto losses are also subject to be reported, and any loss is treated as capital losses. This means that realized losses can be used to offset any capital gains. Investors can use this to reduce their overall tax liability, and the deduction can be applied to offset capital gains due from other investment assets such as stocks. This can work in favor of investors, although, if there are more losses than gains there is a maximum cap of $3000 that can be declared each year to offset other income. The remainder can be carried over to further years until the complete amount of loss is accounted for.
How to Calculate Crypto Taxes
Calculating taxes can be conducted in a variety of ways, and the crypto tax rate can differ depending on the length of time assets are held, the value of the initial purchases and the volume of profit. These factors will directly influence the amount of tax owed depending on the income tax and capital gains bracket. Higher volumes of crypto assets traded which are realizing higher profits will fall into the higher tax bracket category and the amount can be substantially more, especially if they are short term gains.
The first place to start when calculating how much tax is owed is to know the initial value of investment to the given crypto assets. This is called the cost basis and it is the market value in USD that the crypto asset was paid for at the time of purchase. For staking, mining and other rewards, the cost basis will be the market value price in USD at the time of receiving the tokens. Below we will discuss the different crypto tax rates for both income tax and capital gains and identify the methods of declaration. Specifically for income tax there are different rates that can apply to whether an individual is filing independently, as a head of household, married filing jointly with their partner or married filing separately.
Tax Rate for Crypto Income Tax vs Capital Gains Tax
The application of tax for income tax and capital gains are very different and the rates applied vary based on the amounts through either earnings or profits from trading. Below we will cover the differences and outline the various rates applied. It should be noted that there are different financial brackets of filing based on a person’s status meaning one can file either as a single, as a head of household, married filing jointly and married filing separately.
Income tax is due when you earn crypto as a form of income or if you dispose of your crypto asset within 12 months of owning it. This means that the income tax rate is applied when calculating short-term capital gains and the tax bracket rate is between 10% – 37%. See the table below for a more detailed outline.
Tax Rate Single Head of Household Married filing Jointly Married filing Separately 10% $0 – $11,000 $0 – $15,700 $0 – $22,000 $0 – $11,000 12% $11,001 – $44,725 $15,701 – $59,850 $22,001 – $89,450 $11,001 – $44,725 22% $44,726 – $95,375 $59,851 – $95,350 $89,451 – $190,750 $44,726 – $95,375 24% $95,376 – $182,100 $95,351 – $182,100 $190,751 – $364,200 $95,376 – $182,100 32% $182,101 – $231,250 $182,101 – $231,250 $364,201 – $462,500 $182,101 – $231,250 35% $231,251 – $578,125 $231,251 – $578,100 $462,501 – $693,750 $231,251 – $346,875 37% $578,126+ $578,101+ $693,751+ $346,876+
Capital Gains Tax
Capital gains tax is applied when a person sells crypto that has been held for longer than 12 months and has realized profits. The percentage rate to pay is dependent on the overall income and the capital gains tax is due only on the portion of profits. This is the difference between the purchase price (cost basis) and the selling price. Due to the nature of cryptocurrency, when purchasing and selling at different times there can be confusion as to which asset to use in the calculation. How can a person differentiate a first and second purchase of the same asset?
There can be significant differences due to the cost basis price, for example, a person buys 1 BTC in 2020 at $5000 and another BTC in 2021 for $25000. They then proceed to sell 1 BTC in 2022 for $50000. The result has a very weighty difference – if the capital gains is calculated using the first BTC purchase price it would be $45000, and if the second BTC price is used then the capital gains is $25000. This is why in the USA there are multiple cost basis accounting methods that can be used which are outlined below.
FIFO (First in First Out): The first asset bought is the first sold
LIFO (Last in First Out): The last asset bought is the first sold
HIFO (Highest in First Out): The higher price asset is considered and sold first
SPEC ID (Specific Identification): The specific asset is chosen and sold, and record identity needs to be provided.
Long Term vs Short Term Capital Gains
As mentioned above, capital gains are either considered short-term or long-term. Short-term capital gains can be seen as a crypto trader tax. If a person is frequently trading through buying and selling assets that are not held for longer than a 12 month period, this is considered short-term gains. Alternatively, if a person buys an asset and holds it for a period longer than 12 months, then this will fall under long-term capital gains once the asset is sold.
When short-term capital gains are considered then the calculation should use the income tax rates and amounts which are usually higher, between 10-37%.
If the gains fall under long-term capital gains then the rates will be either 0%, 15% or 20%.
The key deciding factor is to consider whether the asset was sold within 12 months, or if held for more than 1 year and then sold.
How to Pay Crypto Taxes in the US 2023
In order to pay crypto taxes in the US, records must be kept of all transactional data. There are specific forms that will need to be filled in order to file tax returns on crypto assets. The first step is to calculate crypto gains and losses. The form to fill for crypto disposals is IRS form 8949, and there are two parts, short-term and long-term. When filing, the correct option should be selected at the top to identify whether the short term transactions are those which either match or don’t match those which the exchanges provide in form 1099. The gains and losses should be outlined on form 8949 with the description of the asset, the date acquired, the date sold, the fair market sale value, the cost basis and then the net gain or loss. The totals of the net gain or losses should be filled into form 8949 on Schedule D part. Any income should also be reported depending on how it was earned, either on Schedule 1 or Schedule C part. Once this process is complete the data should be represented on one’s tax return and sent to the IRS.
How to Avoid Crypto Taxes
The question that always arises to investors is do you have to pay taxes on crypto, and the short answer is yes. However, there are certain events that occur which are non-taxable which we will discuss below.
The main way to avoid crypto trader tax, is simply to not trade the asset. If you buy and hold crypto long term this is not taxable. The initial purchase of cryptocurrency with fiat, like USD, is not a taxable event either. Therefore, buying and holding crypto long-term is a way to avoid having to pay taxes on digital assets. It is good to note that tax will be incurred later on if the asset is sold for profit resulting in realized gains.
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Donating crypto to charitable organizations is also a method to reduce one’s tax obligation. Therefore, in the US you will not be realizing any capital gains if donating crypto thus not having to pay capital gains tax on that amount. Further to this, charitable donations can be used to claim tax deductions and this will be set at the market rate on the day of donation. It should be noted that the organization being donated too should fall under the 501(c)3 status, and if donating more than $500 then the correct form should be filled and submitted along with your tax return. If donating more than $5000 then a qualified appraisal will also be required.
Filing crypto taxes can be a daunting task and the key here is to ensure all transactional data is kept in an organized manner. It is clear that filing taxes are mandatory in the US and the IRS has taken measures to ensure exchanges are reporting crypto holdings of their clients. Whether in Europe or the USA, if one is managing a substantial portfolio it may be a good idea to look into relocating to a more favorable jurisdiction towards crypto taxation. There are several platforms online which assist with accounting crypto taxes and some also have simple API plug-ins to exchanges which automatically tracks trades and provides ready to go data. If unsure whether data is filed correctly it is always good to reach out to a qualified accountant as this can be the best cause of action to avoid any misreporting and penalties.
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