Cryptocurrencies are digital stores of value that can be used as a medium of exchange. They have no physical tokens like dollar bills and no central government control. Instead, cryptocurrencies rely on encrypted digital ledgers to record and verify transactions.
However, if you are investing in cryptocurrencies, you should be aware of how crypto is taxed. There are several ways you can be held liable for paying taxes on your cryptocurrency holdings, including a taxable event that may occur when you exchange one cryptocurrency for another. If you do not keep records of your transactions, it could be challenging to determine when you owe taxes and how much you owe to your government. If you fail to pay your crypto taxes, you could face costly fines and even imprisonment.
How do crypto taxes work?
The Internal Revenue Service (IRS) defines cryptocurrencies as property, and all transactions involving property are taxed by law. Buying cryptocurrencies is not a taxable event in itself. You do not pay taxes on increases in the value of cryptocurrencies, only when you actually sell it for fiat. If you sell, trade, or dispose of cryptocurrencies in any way and recognize gains, you should pay taxes on those gains. If you concede a loss, you can deduct it from your taxes (in certain jurisdictions).
When do you have to pay taxes on crypto?
The taxation of cryptocurrencies varies around the world. In the United States, cryptocurrencies are considered digital assets that should be treated like stocks, bonds, and other investments, according to the Internal Revenue Service (IRS). The taxes on crypto differ depending on how you acquired your cryptocurrencies and how long you held them.
Transactions that are considered non-taxable events:
- As a rule, you do not have to pay taxes just because you own cryptocurrencies. Tax is usually incurred when you sell, and that gain is “realized.”
- Donating cryptocurrencies is qualified as a tax-exempt charity or nonprofit.
- You are not required to pay tax when you receive or give crypto as a gift.
- Transferring cryptocurrencies between wallets or accounts you own is not taxable, just in the way you transfer money between different bank accounts.
Transactions that are taxable as capital gains:
- If you sell cryptocurrencies for cash, you will have to pay taxes.
- The crypto conversion is considered a taxable event by the IRS. In this case, you will have to pay taxes if you sell your digital asset for more than you paid for it.
- Spending crypto on consumer products is taxable since you have to sell the asset before spending it.
Transactions that are taxable as income:
- If you accept crypto as payment for a good or service, you must report it as income to the IRS.
- If you mine cryptocurrencies, you will likely have to pay taxes on your earnings based on the market value of the mined coins at the time you receive them. Crypto mining is taxed as self-employment income.
- Staking rewards are treated like mining proceeds. Taxes are based on the market value of your rewards on the day you receive them.
- If you are earning a return by holding certain cryptocurrencies, taxable income is also considered.
- You may receive airdrops from a crypto company as part of a marketing campaign or promotion. Airdrops are taxable as income, and you must report the amount on your tax return.
- If you receive other incentives or rewards, you should also report them as income.
How is the cryptocurrency tax rate calculated?
The Internal Revenue Service may tax cryptocurrencies as short-term or long-term capital gains. If you sold or exchanged cryptocurrencies in the United States, you would pay capital gains taxes using two factors:
- Your realized gains or losses;
- Your holding period starts when you buy a coin or make a transaction. It continues until the day you trade or sell.
Holding crypto over a year or less will amount to short-term capital gains; therefore, it will be taxed at ordinary income tax rates. Holding cryptos longer than a year will result in long-term capital gains tax rates, which vary between 0% and 20% depending on your ordinary income tax level.
Tax rates among different counties
Among the countries with the highest cryptocurrency taxes are:
- In the United States, cryptocurrency is treated as capital gains and taxed accordingly. Taxes on short-term capital gains range from 10% to 37% (depending on your annual income), whereas taxes on long-term gains are capped at 20%.
- UK taxpayers have to pay 10% tax on cryptocurrency transactions. For higher and additional rate taxpayers, tax is charged at 20%.
- In the Netherlands, if the taxable base value of crypto assets is higher than 50,000 Euro, you will be subject to the 31% wealth tax.
- Crypto transactions are treated as capital gains in Australia. If your crypto gains exceed $10,000, the tax rate is 50%.
- Canada treats crypto assets as commodities for tax purposes. The highest applicable tax rate on digital assets is 33%.
Some countries impose zero or low taxes on crypto transactions. These countries include Germany, Switzerland, Portugal, Singapore, Cyprus, Malta, Malaysia, and Bermuda.
Can you write off crypto losses?
You only owe taxes if you sell or spend it at a profit. For instance, if you bought $5,000 worth of Ethereum and sold it for $8,000, your taxable gain would be $3,000. However, if you sold the same Ethereum for $4,000, you’d owe nothing in taxes. You could even use part of your $1,000 in ETH losses to offset other investment gains.
Many countries consider cryptocurrencies to be property or assets that accrue capital gains when sold. Since many countries now share information about capital gains and income from foreign assets with other countries, owning digital assets may have income or capital gains tax consequences in the country where you reside. We recommend checking the current tax legislation in your country of residence for more information.