New and useful content will be added to our network, and may even end up on the Learn Crypto feed.
Please note that this article is not tax advice. Consult a qualified tax accountant/professional or contact your local tax authority for clarification of how rules on crypto taxation may apply to you.
At times the crazy world of crypto seems to be completely disconnected from reality, with prices defying gravity by forever going up. Unfortunately, your crypto experience is subject to the rules of everyday life with two famous certainties - death and taxes. This article won’t comment on your life expectancy but if you haven’t considered that you might need to pay tax on your crypto activities, you might want to sit down while reading this.
The news isn’t all bad, as some countries have taken a very progressive approach to crypto taxation, but given the industry is so new, the process is far from simple. However, if you have significant sums invested in crypto or are trading regularly, accounting for taxes should be on your to-do list.
Tax obligations related to crypto will vary in detail from country to country - which we address below - but before we delve into the detail, we’ll try and address the main distinctions in how cryptocurrency is regarded (from a tax perspective) which make a big difference to any obligations you may have.
Any tax you are liable for on the sale of your crypto will depend on how your tax authority regards cryptocurrency. Some of the main differentiators classify crytpo as:
Though Bitcoin, and many coins that have followed, function as currency, their speculative nature and source of competition with national currencies, means that very few governments consider them to purely be foreign currency - Israel and Bulgaria are two exceptions. This has a wide implication for how cryptocurrency is taxed.
Where cryptocurrency is considered property - the most common distinction - it will be liable for what is known as Capital Gains.
It may come as a surprise to you, but if you buy a house, art, shares or gold as an investment, and then sell it on, many governments expect a share of any profit. Conversely, if you lose money, you can apply this as a tax loss (more on that below).
Some countries, such as Germany, consider cryptocurrency to be ‘private money’ which seems a logical distinction. Governments have historically held the privilege of creating money, and made it illegal for anyone else to create their own and compete, unless specifically allowed.
Cryptocurrency is unique in that most tax authorities were caught out by its rapid increase in use, so have made retrospective classification.
The case of the Liberty Dollar in the USA is a good example. Created in 1998, its creator, Bernard Van NotHaus, was convicted on multiple charges because the Liberty Dollar was too close in resemblance to the actual dollar.
One of the reasons why the issue of crypto taxation is so complicated is that you may be liable for at least two types of taxation - Capital Gains and Income Tax.
As mentioned above, if your country of residence classifies crypto as property it will be subject to Capital Gains. This simply means that if you sell something regarded as property for more than you bought it - subject to exemptions - the taxman will want a cut.
Your regular source of income - usually your job - is subject to tax. Any other activity that is also considered to be a source of Income, may also be liable for tax; this includes crypto, given that it now offers a huge range of services providing a regular return.
Within each category - Capital Gains & Income Tax - you’ll need to be aware of the relevant ‘taxable events’.
This might sound like it should have something to do with the Olympics, but a taxable event is any activity which your tax authority expects you to record, and subject to small print, report in your annual submission and pay the required tax.
We’re going to list the main taxable crypto events, but as there is no one consistent approach, we’ll country-by-country outlines below but you should consult your local tax authority or a tax accountant to understand the full details.
The most obvious activity which is subject to Capital Gains is buying then selling cryptocurrency - buying in itself isn’t a taxable event.
If you made a single purchase of a cryptocurrency funded with fiat (e.g Euros) and then sold the entire amount for Euros in a single trade, you can simply subtract the price you paid from the price you bought.
Any resulting profit should form part of your tax submission for Capital Gains.
E.g You buy BTC in August 2020 for €10,000; You sell it November 2020 for €20,000
€20,000 - €10,000 = €10,000 liable for Capital Gains tax.
Many people wrongly assume that Capital Gains simply applies to the Fiat > Crypto example above. It will vary by country, but Capital Gains will generally relate to any disposal. How disposal is defined by your tax authority will be the crucial differentiating factor, but it may well cover:
Capital Gains doesn’t relate to simply transferring cryptocurrency between addresses you control or buying it in the first place.
If your crypto activity is more complicated then our very simplistic example - which is most people - then looking at that list of taxable events and thinking about the complexity of the required calculation, may bring you out in a cold sweat.
Before hitting the panic button, there will be rules that should help you unpick a complicated trade history, often called ‘share matching’ or ‘share pool accounting’
Share pool accounting provides a basis for the order of disposal of a complex history of trades. It might include:
In some cases your tax authority may leave it up to you to figure out a way to work out the cost basis for tricky areas like Defi. In this situation use what you think is the most sensible approach, keep a record of your calculations/logic and be consistent in its application. What is in your favour here is that the tax authority is essentially saying ‘we don’t know, make a sensible suggestion.’
Where you derive a regular income from a crypto asset or service, the pesky taxman may also want to know about it. Here are some of the most obvious, and again, this will vary by country.
If you are trading to the extent that it constitutes a source of income, then you may be expected to pay income tax. You’ll need to look into the local rules around what constitutes hobby trading vs trading as a living..
If you are generating income from mining, you may be liable for tax. This should be easier if you are part of a Mining Pool, as you should have access to a dashboard of exportable data.
If you’ve been taking the DIY approach, you’ll need to do more leg work setting off expenses against revenue. If and when you sell the proceeds - assuming they are paid in crypto - you’ll also need to record those for Capital Gains.
Any income generated from staking or interest bearing services may be liable for tax in the same way that any interest earned on your regular fiat bank account is often taxable.
This might extend to tokens earned from DEFI which may be initially considered as an income and if later disposed of, liable for Capital Gains.
Any work you do that is paid in crypto will likely be treated as income and subject to tax. This may be complicated if paid in tokens that are yet to have any value. There will likely be a category for that. In the UK it is considered ‘money’s worth’ but this will vary around the world.
As above for Forks, take a sensible approach to the value of tokens received - for example by comparing to that of a similar token’s price at listing - and be consistent.
If the tokens do eventually have real value and you sell them, you’ll probably be liable for Capital Gains tax.
Forks and Airdrops may be considered a form of income, but a lot will depend on how the individual Forks or Airdrops are managed by the organisations behind them.
Even though there will be guidance available from your tax authority, it will still be a daunting task to collate your trading history across multiple wallets and exchanges. That challenge should be made easier by the fact that the majority of exchanges should allow you to export your trading history through an API feed or by manually exporting a CSV, while Wallet transactions can be identified from each relevant address.
If you don’t fancy long nights making sense of your trading history from a tax perspective, there are now a growing number of crypto tax services that for a fee, will do it for you.
All you’ll need to provide is connect your wallet and exchange and they will do most (thought not necessarily all) the heavy lifting. Read our blog article on how crypto tax services work.
Though the idea that you might have to give away your hard earned profits might be painful, the good news is that your trading losses might be tax deductible. Where taxable crypto events are loss-making, you might be able to count these against any gains as a Capital Loss. The net result might be that you are actually due to a refund - who knew that buying Dogecoin at the top would provide some benefit!!
Now the thought that a share of the profits you may have made from this magic internet money has to go to the government may put your day on a bit of downer. It isn’t all bad.
Most tax systems work on the basis of taxable allowances. What this means is that for each category, tax isn’t liable until a certain amount is reached. In the UK for example, Crypto held as a private investment is liable for Capital Gains but only after the first £12,500 (2020/21). So any capital gains you make from crypto below £12,500 - within the financial year - likely mean you don't have to make a tax return, but there are other considerations - such as the level of disposals - which mean you should check with the official guidance from your local tax authority.
Given the complexities of tax, there is an entire industry dedicated to mitigating tax liabilities. If you’re not quite in that bracket, there are some simple techniques worth considering which can make the most of allowances, such as gifting to a husband, wife, partner etc
By gifting crypto, you may effectively double the available allowance.
Given that selling your crypto at a net profit is likely to incur a tax cost, you want to consider a different approach to unlocking its value. There are now a huge number of crypto banking services that will offer instant loans against crypto collateral.
There is a separate knowledge base article on the subject of CEFI, but the headline message is that borrowing against crypto to release value isn’t taxable. It isn’t without risk, but it can enable you to receive a credit line of stablecoin or fiat to pay off a loan or mortgage, without involving the taxman or crucially, you having to sell your crypto. Interest can be paid from any increase in value, but be aware that if the loan to value ratio (LTV) falls below a certain level, your collateral will be sold.
In late October 2022, the IRS released updated draft guidance for cryptocurrency and other digital asset reporting for 2022 tax returns, published at this link: https://www.irs.gov/pub/irs-dft/i1040gi--dft.pdf.
Of note is the shift away from the terminology “virtual currency” to “digital asset” in the typical questions asked on the form, specifically, the yes or no question that has been asked since 2019. Filers will now have more guidance on how to answer those questions to disclose crypto activities that are taxable. Most importantly, “digital asset” (instead of "virtual currency") now includes activities related to non-fungible tokens or NFTs, which grant ownership to the filer for items such as art, as well as activities related to stablecoins, which are cryptocurrencies pegged to a real-world asset. Filers must now check "yes" if they received these assets as a reward or award for services, and if assets were gifted, sold, or exchanged.
In fact, many new terms and categories have been included to broaden the IRS crypto language, such as digital assets from “play-to-earn games,” which have become a thematic area for crypto gains in 2022. On the other hand, terms such as “cryptographically secured distributed ledger” add new aspects of vagueness that taxpayers may find to be confusing.
Some other pieces of guidance appear conflicting as well. For instance, if transfers are under $16,000, there is no requirement to submit a gift tax return for 2022. At the same time, filers must still check “yes” for gifts that may be below that amount.
Not to worry! This instructions draft has already received requests for revisions and clearer instructions with examples from the American Institute of CPAs and a clearer version should be ready before finalizing the 2022 tax return.
If you are reading this and worrying that you have completely dropped the ball regarding the tax you might owe on your crypto trading and investing, take a breath.
Depending on the rules specific to where you live you may have no action to take if:
What you shouldn’t do is put your head in the sand and hope that the issue goes away. It was inevitable that the benefits crypto hodlers have felt in terms of value would catch the attention of tax authorities.
The IRS - America’s tax authority - now asks the following question at the top of Form 1040: “[a]t any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
This clearly demonstrates a zero tolerance policy and tax authorities are catching up in terms of sophistication, utilising blockchain analytics internally, or buying in services like Chainalysis or Elliptic.
Authorities are also working directly with popular exchanges who are sharing details of customers trading above a certain threshold. (See the image below).
You may decide that risk of coming to the attention of the tax authority doesn’t justify the hassle of figuring out your potential liability. That choice is yours, but the next article in this section explains how online crypto tax services work to try to automate the arduous task of accurately calculating the tax liabilities from you crypto activities.
Next step: How to run a nodeGo to next step
New and useful content will be added to our network, and may even end up on the Learn Crypto feed.
Well done! You help us make the awesome product. You help us make the awesome product
The application request form has been successfully sent. Our team will review your application as soon as possible and contact you.
Meanwhile you can join our Discord server .