How to use crypto: A guide to paying tax on crypto

What you'll learn

  1. Different tax classifications of crypto
  2. Capital Gains vs Income Tax
  3. Taxable crypto events
  4. What you should do now

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.

How tax authorities classify crypto

Any tax you are liable for on the sale of your crypto will depend on how your tax authority regards cryptocurrency. The main differentiators are:

Foreign Currency

Though Bitcoin, and many coins that have followed, function as currency, their speculative nature 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.

Property

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).

Private Money

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.

Capital Gains & Income Tax

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 list the country-by-country details below.

Capital Gains

Buying & Selling

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:

  • selling crypto for money
  • exchanging crypto for a different type of crypto
  • using crypto to pay for goods or services (if you have a crypto debit card)
  • giving away crypto to another person
  • buying an NFT with crypto
  • Airdrops & Forks

It doesn’t relate to simply moving cryptocurrency 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:

  1. Same day matching - Matching trades that happen within the same 24hr period
  2. 30 day matching - As above but using a 30 day period
  3. Pooling - Price averaging all trades not covered in 1 and 2

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 Forks and Airdrops. 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.’

Taxable Income Streams

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.

Trading

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..

Mining

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.

Staking/Interest

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.

Being paid in crypto

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.

Some good news

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 and wallets should allow you to export your trading history in CSV.

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. Here are a few of the available services, none of which Learn Crypto is affiliated with:

Capital Losses

Though the idea that you might have to give away your hard earned profits might be painful, the good news is that losses are tax deductible. So where any taxable events are loss-making, you can 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!!

Tax Allowances

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, Bitcoin held as a private investment is liable for capital gains but only after the first £12,500. So any profit you make from selling Bitcoin below £12,500 within the financial year doesn’t need to be declared.

Gifting

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 effectively double the available allowance.

Taking a loan rather than selling

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. 

What should you do now?

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:

  • Any tax owed is below the specified allowances
  • Your activity predates any rules; most legislation relates to recent activity
  • Trading losses may even mean that you get a tax refund rather than a bill

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. 

They are also working directly with popular exchanges who are sharing details of customers trading above a certain threshold. (See the image below).

Coinbase UK tax notice crypto

Meh, what’s the worst that can happen?

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 it is worth knowing that if you are unlucky enough to be audited, tax authorities will generally go back a few years, and may apply penalties or court orders. 

This all depends on the country and circumstance. Right now there may be some leniency, given the novelty of crypto, but you shouldn’t rely on ignorance as a defence.

Crypto Tax Guidelines Country-by-Country 

Having looked at some of the general concepts around crypto taxation we can now see how they apply with a list of specific country crypto tax guidelines:

FAQ

Crypto tax rules in the USA
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Cryptocurrency is regarded as property in the USA. You’ll need report Capital Gains and Income. This means:
Capital Gains
Selling your crypto for fiat
Trading crypto-to- crypto
Using cryptocurrency for payment e.g a debit card
Buying an NFT with crypto.

Income
Airdrops & forks
Staking/Interest/Mining
Getting Paid

There is no threshold, all activity should be reported. Exchange may be mandated to automatically report account activity of US users to the IRS.

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?” 

The rate cryptocurrency is taxed at depends on how long you held the asset for and your annual income. If you held the asset for less than one year, gains are taxed at the same rate as your ordinary income (10% – 37%). More than one year, a range of 0% – 20%.

The so-called Wash Rules used for stocks doesn't apply
"Those taxpayers who want to maintain substantially identical positions after taking their losses for tax purposes can reacquire substantially identical units at the then market price at less than their basis in the units they disposed of. Such a sale and reacquisition would allow such taxpayers to maintain their virtual currency positions while reporting tax losses." Reference

Robert Wearing, deputy associate chief counsel at the IRS, told a virtual conference on May 12th that, in line with the normal treatment of taxes on property, crypto can be seized in the event of failure to pay.

The IRS are using a service called TaxBit to verify the tax submissions of active crypto traders.

For further information see the FAQs produced by the IRS related to taxation of virtual currencies.

Crypto tax rules in the UK
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In March 2021 Her Majesty's Revenue & Customs (HMRC) published consolidated crypto tax guidance

There is no specific designation, but the guidance tends to consider crypto as property so liable to Capital Gains, but where earned as income also liable to Income Tax. it does make the following distinction based on use case which should help you decide which tax applies: 
Exchange tokens — used to make payments (e.g. bitcoin)
Utility tokens — provide the holder with the right to access to a good or service
Security tokens — give the holder the right to profit and loss in a business venture
Stablecoins — coins that are pegged to another asset with a stable value such as fiat currency or precious metals such as gold


Any disposal will be liable for Capital Gains, which includes:

selling cryptoassets for money
exchanging cryptoassets for a different type of cryptoasset
using cryptoassets to pay for goods or services
giving away cryptoassets to another person

Activities that trigger Income Tax include:

Airdrops & forks
Staking/Interest/Mining
Getting Paid

For the current tax year (to April 2020) the first £12,000 of Capital Gains are not taxed and need not be declared.

If you trade cryptocurrency as a business activity, income will be subject to Income Tax rules.
You can claim Capita Losses - offsetting tax - as well as Capita Gains.

Crypto tax rules in Portugal
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Portugal has one of the most progressive crypto tax regimes, The Portuguese Tax and Customs Authority doesn't consider crypto to technically be a currency. This means that they don't tax it from a personal Income Tax or Capital Gains perspective.

Sales of cryptocurrency will only incur Income Tax if "by their regularity ends up constituting a professional or entrepreneurial activity of the taxpayer".

Crypto tax rules in Germany
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Crypto taxation in Germany is very progressive as it is one of the few countries that doesn't classify cryptocurrency as property from a tax perspective, instead considering it private money. 
Cryptocurrency is subject only to short-term capital gains. If you hold crypto for more than a year in Germany, you will pay no capital gains. This essentially rewards hodling, and only taxes short term speculation, though capital gains on crypto held for less than year only apples to amounts above 600 euros.
As with most jurisdictions income from derived from crypto related business activities will be subject to corporate taxation.

Crypto tax rules in Singapore
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Singapore has extended the light-touch approach to taxation of financial services to cryptocurrency. Neither individuals or businesses are liable for capital gains on crypto. Businesses that trade crypto or accept it as a means of payment will have to pay income tax.

Given Singapore considers businesses as resident based on where the activity takes place, many location agnostic crypto businesses are registered in Singapore.

Crypto tax rules in Estonia
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Estonia treats cryptocurrency as property for individuals and it is only subject to income tax. at a rate of 20% and only kicks in after your income tax allowance is reached. This applies to trading, purchasing, sale or exchange of cryptocurrency. As there is no Capital Gains tax, you cannot declare Capital Losses. 

Estonia is progressive in terms of attracting crypto related businesses. It operates an e-visa system and doesn't charge VAT on crypto investments.

Please note that this article should not be construed as taxation advice. For official guidance refer to your local tax authority or a qualified taxation accountant.

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