How Is Cryptocurrency Taxed?
Cryptocurrencies are subject to tax in many countries. In many cases, trading, spending or selling cryptocurrencies is often considered a taxable. The capital gains and losses you have will be taken into account while calculating your taxes. It is important to note that you will have to include your capital gains and losses in the calculation of your taxes. Furthermore, if you receive crypto as payment, you might also have to pay income taxes.
If you live in a jurisdiction that is different from your own, be sure to consult a tax professional. Tax authorities are frequently cooperating with crypto exchanges in order to keep track of crypto transactions. When you try to evade tax, you can face penalties such as financial penalties and even more severe sanctions.
Introduction
You will probably have to pay crypto taxes at some point, whether you hold or trade. Crypto assets are typically treated as capital assets by tax authorities, which may vary from country to country depending on the exact amount. Paying your taxes is a legal requirement, so it is important to get it right.
As a part of this article, we will go over some basic principles which are applicable to crypto taxation in general. We recommend consulting a local tax professional whenever possible since the taxation of cryptocurrencies may differ by country.
Is there a tax on cryptocurrency purchases and sales?
There are no single answers to this question. You will be able to calculate your taxes based on the state in which you live, the time you have held your cryptocurrency for, and other factors. It is usually the case that you will pay taxes or offset losses when you sell, but not when you buy.
In general, taxes aren't always simple in the world of cryptocurrencies. Cryptocurrencies are still a fairly new asset, which means that tax authorities are still working to develop crypto regulations. There are certain steps you need to take to make sure you keep track of your taxable gains and losses, and you have a responsibility to pay the correct amount of tax, depending on the rules in your country.
What’s a taxable event?
Taxable events refer to any transactions or activities on which you are required to pay taxes.
It's not universal. The same event might not be taxable in one country while it might in another. A lot of transactions involving commodities, investments, and other capital assets are taxable as they are deemed to be capital gains. A digital currency, such as Bitcoin or BNB, purchased with fiat currency is unlikely to result in taxation. But, if someone sells or trades their crypto, they will be liable for taxes.
The result of a taxable event is either a capital gain (profit) or a capital loss (loss). An asset you own appreciates in value while you hold it and you exchange it for a profit, then you have made capital gains. You would have incurred capital losses if you sold or traded that asset at a loss.
Depending on your local tax authority, you will also need to determine whether capital gains are taxable events. The amount of capital losses that you may be able to deduct from your capital gains might be able to reduce the amount of taxes you pay. You may be able to deduct capital losses from your capital gains to reduce your taxes. To assist in this calculation, taxpayers should keep a record of the date of the trade, the cost basis (purchase price), the selling price, and any fees associated with the trade.
What are taxable and non-taxable events?
taxable events include:
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Exchange of cryptocurrency for fiat currencies (e.g., USD, CAD, EUR, JPY, etc.).
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A cryptocurrency is exchanged for another cryptocurrency (e.g., BTC for ETH).
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Spending cryptocurrency. Directly spending crypto on goods or services can incur taxes in countries such as the U.S., UK, Canada, and Australia if you made profits.
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Receive cryptocurrency through a fork, airdrop, or mining operation.
generally not considered taxable events:
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It is possible to purchase cryptocurrency using fiat currency (except for those cases where the purchase price is less than the fair market value of the coin purchased).
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Making a donation of cryptocurrency to a tax-exempt organization.
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Gifting cryptocurrency up to a certain value.
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Moving cryptocurrency from one wallet to another wallet owned by you.
How is cryptocurrency taxed?
It is essentially the official classification of bitcoins and other cryptocurrencies that will determine how they will be taxed within a country. Cryptocurrencies are commonly regarded as capital assets, rather than as currency, by tax authorities. In countries that have not passed specific laws regarding crypto taxation, crypto profits are expected to be taxed according to their official designation. There are some jurisdictions that take an easier approach than others. Germany, for example, does not impose taxes on crypto assets held over a year. Singapore, Malaysia, and Portugal also have very lenient tax laws for crypto.
You may also have to pay income tax to the government on your Bitcoin or crypto income. A full-time employee, a freelancer, or a crypto trader who is paid in crypto is likely to be liable for income tax on the crypto income receive. Tax rates on crypto earnings are usually determined by the amount of money you make.
Depending on your income threshold, there might be a situation where you do not owe any tax. There are various income brackets, and each bracket has a different tax rate. The higher the bracket, the higher the tax rate. If you make your primary income from trading, it is a good idea to find out whether you are subject to capital gains taxes or income taxes.
How do I calculate my taxes?
It should be easy to calculate your tax liability if you purchased cryptocurrency, HODLed it, and then sold it later. Here is a simplified, US-based example. First of all, we must figure out how much capital we have gained or lost in US dollars. Let's look at the formula:
Fair market value - Cost basis = Capital gain / Loss
In most cases, the fair market value of a stock is the current spot price you would encounter on an exchange. The cost basis is the price you originally paid plus any fees you paid to get the asset. If two Bitcoins were purchased for $10,000 for two years, and they were sold for $30,000 two years later.This means you now have a profit of $40,000.
$60,000 (fair market value) - $20,000 (cost basis) = $40,000 (capital gains)
Capital gains tax is a tax that is based on your taxable income, the type of tax filing status you have, and how long you have owned the asset. If you have kept your cryptocurrency for more than a year, you will have to pay a long-term capital gains tax.
Your taxable income determines how much tax you have to pay. Capital gains are included in this calculation. For example, if you already have $50,000 in taxable income, and you add your capital gains to that, your total taxable income will be $90,000. If you earn a cryptocurrency gain, you will be taxed at a capital gains tax rate of 15% under the Internal Revenue Service's chart below.
Tax-filing status 0% 15% 20%
Single Less than
Married filing jointly
Married filing separately
Head of household
If you are a regular trader, then your calculations will require a bit of work. Tax consequences of fiat purchases and sales are generally easier to understand, but trading a cryptocurrency for another becomes more complex. Consider the case where you have been trading BNB and Ether (ETH). The following is your trading history:
Date Trading Activity
17 Feb 2021 Purchased 1 BNB for $150
21 Feb 2021 Purchased 1 BNB for $300
02 April 2021 Purchased 1 ETH for $2,000
11 April 2021 Trade 1 BNB (worth $500 on the spot market that day) for 0.24 ETH
For our example, you must calculate the capital gains and losses you have experienced as a result of trading your BNB for ETH. Capital gains are the difference between the fair market value ($500) and the cost basis. So then, which transaction do we use as our cost basis? It is necessary to make a decision after you have previously purchased BNB at two different prices.
The first-in, first-out (FIFO) and the last-in, first-out (LIFO) methods of accounting are both used to calculate this. FIFO is the standard for many countries, whereas LIFO tends to be used only as an alternative in the United States. With FIFO, the asset you bought first is the one that's sold first. For our example, we would first sell the $150 BNB we purchased.
According to FIFO, the cost basis for our taxable event would be $150. In our formula, this means that $350 in capital gains has to be paid according to the following:
$500 (fair market value) - $150 (cost basis) = $350 (capital gains)
According to LIFO, the most recent acquired asset is the first to be sold or traded. Alternatively, LIFO may rely on the cost basis of the purchase of 1 BNB for $300 instead. This would result in a capital gain of $200.
$500 (fair market value) - $300 (cost basis) = $200 (capital gains)
To calculate how much tax you are liable to pay in a tax year, you can deduct your capital losses from your capital gains. Most countries separate short-term capital gains and losses from long-term capital gains and losses and treat short-term gains and losses separately (for holdings less than a year).
How do tax authorities know about my cryptocurrency?
There are several tax authorities, such as the IRS, ATO, CRA, HMRC, and others, that track cryptocurrency transactions and take action in order to enforce tax compliance. Major cryptocurrency exchanges are also cooperating with tax authorities.
Governments are using tools such as Chainanalysis to locate cryptocurrency users. They can tie blockchain transactions from regulated cryptocurrency exchanges to personal cryptocurrency wallets if they have enough information. Even multiple layers removed from exchanges are included in these analytics in order to combat tax evasion.
Other tax authorities, including the IRS, share information about cryptocurrency usage with governmental bodies, academic institutions, and international governments.