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Intermediate

3 months ago

Crypto Trading Taxes: Are There any Taxes for Crypto Traders?


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In general, crypto-trading incurs a tax obligation in three ways: when converting a cryptocurrency into a regular currency (like dollars, pounds, or euros), exchanging/mining crypto to make a profit, or using a cryptocurrency to pay for goods or services. Some other tax-incurring actions like staking This article will answer questions related to taxes that may arise in the early stages of crypto trading or mining.


Contents

Сrypto trading: Taxes & legislation worldwide

Even though Bitcoin has already gained a lot of popularity globally, some countries actively oppose its use. For example, Russia has banned the purchase/sale of goods and services using Bitcoins. China moved even further and almost completely banned Bitcoin, imposing restrictions even on mining. India plans to follow China and restrict the use of Bitcoins. Some countries, on the other hand, are encouraging and trying their best to legalize Bitcoin, as El Salvador has done.

Other countries are more reticent about cryptocurrency. The EU, for example, supports the idea of digital currency and doesn’t restrict the spread of Bitcoin and other cryptocurrencies in its territory. However, it’s too early to talk about full legalization. Europe’s example holds true for other developed countries like the United States, Australia, and Japan. 

The table below shows some vital information about cryptocurrency taxation in countries that are actively involved in cryptocurrency trading.

Country
Crypto Attitude
Tax Rules
Tax Brackets
Non-Compliance Financial Penalty

U.S.

Property

  • Capital gains taxes*
  • No sales taxes
  • Crypto mining is taxable

0% to 37%, scalable tax

Legal capital gains tax + fine of up to $250,000.

U.K.

  • Asset/Private money 
  • Case-by-case basis
  • Capital gains taxes
  • No sales taxes
  • Crypto mining is taxable

0% to 45%, scalable tax

The legal taxes, interest, and penalties of up to 200% of the tax due.

Germany

Private asset

  • No capital gains taxes
  • Mining is taxable income

0% to 45% , scalable tax

Taxes due plus interest for evasions of less than 50,000 euros.

Australia

Property

  • Capital gains taxes
  • Mining is taxable income

0% to 45%, scalable tax

The legal tax itself, 75% of the tax liability, and any interest.

Switzerland

Other funds

  • No capital gains taxes
  • Mining is taxable income

0% to 44%, scalable tax. It varies across the country

The legal taxes + fine of up to 27,500 euros.

Japan

Miscellaneous income

  • Capital gains & mining are taxed. 
  • Lending and trading taxes

15% to 55% scalable tax (20% flat tax for non-residents)

The legal taxes + fine of $22,500.

Russia

Property

  • Capital gains taxes
  • Mining is taxable income

13% or 15% flat tax, based on your income

The legal taxes + fine of 20% to 40% of taxes unpaid.

* According to the IRS, “To correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.”  You can read more about short-term and long-term capital gains taxes on the IRS website.

Other countries follow the same capital gains taxes pattern. If you want to know more about the tax policy of your country, check the website of your tax authorities. 

When are you obliged to pay crypto taxes? 

Generally, you have to pay taxes for any activities that generate an income, for example, buying, selling, or exchanging goods with crypto. Cryptocurrency exchange (crypto-crypto) and mining incur taxes as well.

You’re obliged to pay taxes only for transactions that yield you income; therefore, each transaction must be assessed separately. The income received is the difference between the cryptocurrency's buy and sell prices. For example, if you buy one Bitcoin for $35,000 and sell it for $30,000, you don’t have to declare the transaction because you didn’t receive any income. However, if the situation is reversed, for example, you buy one Bitcoin for $30,000 and sell it for $35,000, the $5,000 you earned must be reported on your personal income tax return.

The purchase price or revenue received must be converted using the cryptocurrency exchange rate in force on the day the income or expense was received. If the transaction is on market terms, the exchange rate of the transaction environment can be utilized; however, if the transactions aren’t in dollars (since the example transactions were conducted in dollars), the income must be recalculated.

Cryptocurrency exchange

When exchanging one cryptocurrency for another, you need to keep an eye on the market price and the income received. Take, for example, a situation where you buy three Litecoins for $420, which you exchange a few months later for some Ethereum. At the time of the exchange, the market price of the three Litecoins had risen to $600. Thus, you received a $180 benefit from the exchange transaction (i.e., $600 - $420), which must be declared and is subject to income tax.

When paying for goods or services with cryptocurrency, you must calculate the income received: the difference between the purchase price of the goods or services received and the cryptocurrency used. For example, in a situation where you had one Bitcoin that you bought in the summer of 2019 for $10,000 and used it to buy a new car in April 2021, when the market price of Bitcoin was $56,000, you received $46,000 ($56,000 - $10,000) of income. Thus, you must declare the income received and pay income tax on it. 

The same method of accounting applies to the purchase of other goods and services (e.g., food, equipment, cosmetics, etc.). However, keep in mind that it’s not legal in all countries to exchange Bitcoins and other cryptocurrencies for goods or services. For example, if you live in Russia, you can’t trade your crypto for other goods or services, but you can mine coins and exchange your crypto for regular money.

It’s important to note that converting income already received in previously taxable cryptocurrencies (e.g., wages, dividends, board member compensation) into regular currency or using it to purchase various goods or services no longer entails additional tax obligations. For example, if an e-wallet for cryptocurrency receives a 0.05 Bitcoin salary from company X for May, the company has already declared it, and labor taxes have already been paid based on the market price. If you use the 0.05 BTC wages received in the wallet to buy various goods and services in Bitcoins, you no longer have to declare it.

Mining

The US and UK classify mining income as self-employed income, hence you have to pay self-employed taxes. Some other countries such China and Russia consider mining as tax authority treats as the production of goods, hence business income taxes. Consequently, you bear the same tax load. In this case, the tax liability arises from the profits generated by the transfer, sale, or exchange of cryptocurrency. If you are constantly mining virtual currency, you should register with a commercial registry and act as a sole proprietor or through a company.

Sole proprietorship allows you to receive a deduction for expenses incurred to generate income from the business, for example, expenditures for equipment and electricity. It's essential to keep in mind that you won't be able to transfer cryptocurrency to a special account to use for tax deferral. If you want to invest as part of a company, you need to comply with the company's tax rules.

If you register as an individual, you cannot get a tax deduction for overhead expenses in most countries, including the US and UK. However, you can get your income tax back, or pay less tax as a self-employed person.

Who monitors сrypto tax payments?

Tax authorities assume control over taxes on cryptocurrency. For example, in the U.S., it’s the Internal Revenue Service (IRS). In the UK, HM Revenue and Customs (HMRC) is responsible for monitoring and collecting taxes. 

Usually, cryptocurrency falls under the so-called Money Transmitter Act (MTA). The MTA aims to maintain a clean cryptocurrency user environment and identify unscrupulous individuals and companies. Since most cryptocurrency transactions are cross-border, international cooperation is an important part of cryptocurrency risk information.

More and more government entities are providing guidance on cryptocurrency tax compliance under the MTA. For example, the state of Pennsylvania’s Department of Banking and Securities (DoBS) is processing and advising on a growing number of cryptocurrency cases. Moreover, in addition to the department's activities, there is also an increasing number of court cases related to cryptocurrency mining, where a company received a tax advantage via an unreasonable sales tax deduction. Also, DoBS recently dealt with several cases where evidence was obtained in the form of data from a foreign cryptocurrency exchange platform. 

What happens if you don’t pay crypto taxes?

The MTA may assign the amount of tax retroactively for three years or up to five years in the case of willful nonpayment of the tax. In addition, you should keep in mind that interest and penalties are added to unpaid taxes.

Also, keep in mind that if you provide false information on your tax return, you are an offender, for which you can be fined an amount determined by the government. For example, in the United States, for willful failure to pay crypto taxes, you will pay a fine of up to $250,000.

According to the IRS, “fraudulent failure to file a tax return entails 15% of the net tax due for each month up to five months with a maximum penalty of 75% of the unpaid tax. Filing a fraudulent tax return: 75% of the underpayment amount.”

If false information is provided to conceal tax liabilities and thereby reduce them, it’s a tax offense punishable by monetary penalties or imprisonment for up to five years. The U.S. government assesses the financial damage caused and issues a commensurate fine. 

On average, in Europe, if you exceed the 40,000 euro untaxed balance, you may be fined and imprisoned for one to five years; if you exceed the total amount of 400,000 euros, the penalty can be increased to seven years imprisonment. For detailed information on the penalties for crypto tax evasion & report falsification, visit the website of your country's tax authority.

FAQ

What types of cryptocurrency transactions are taxed?

Any retail transactions such as purchases and sales incur a capital gains tax. Mining and Bitcoin hard forks are also subject to taxes.

Do cryptocurrency miners have to pay taxes?

Crypto mining is treated as a business model similar to the production of goods in many countries. Hence, miners have to pay income taxes of 10% to 37%.

Do I have to pay taxes when I convert from one cryptocurrency to another?

You have to pay taxes for every operation which yields you income. For example, if you buy 0.1 Bitcoin for $3,500 and sell it the next month for $3,700, your income of $200 incurs a capital gains tax. In the reverse situation—if the price nosedives from $3,700 to $3,500—you don’t have to pay any taxes, as there is no income.

Do I have to report small Bitcoin transactions?

Even though some countries don’t apply taxation on small crypto turnover, you should report every single operation to avoid tax-related issues.