If you HODL or trade, at some point, you'll probably have to pay crypto taxes. The exact amount varies between countries, but it's common for tax authorities to treat crypto assets as capital assets. It's a legal obligation to pay your required taxes, so getting it right matters.
In this article, we'll cover some frequently asked questions with regards to crypto taxation in general – what is a taxable event in crypto and how is crypto taxed? Because the regulatory framework for the taxation of cryptocurrencies differs by country, we always recommend consulting a local tax professional.
Do I Have to Pay Taxes when I Buy or Sell Crypto?
Well, there's no single answer to this question that has definitely come to every crypto user’s mind. Your taxes will depend on your location, how long you've held your crypto, the type of activity you're doing, and other factors. In general, you'll probably need to pay taxes or offset losses for selling but not when you buy.
Taxes in cryptocurrencies aren't always simple. As a fairly new asset, tax authorities are still developing crypto regulations. However, it's your responsibility to keep track of your taxable gains and losses and pay the right amount of tax, according to your country’s regulatory framework.
What is a Taxable Event in Crypto?
A taxable event is a transaction or activity you're required to pay taxes on. These events aren’t universal. A taxable event in one country might not be one in another. Typically, transactions involving the sale of commodities, investments, and other capital assets are all taxable. Purchasing digital currencies like Bitcoin or BNB with fiat currency is unlikely to be a taxable event. However, selling or trading your crypto is likely to be taxed.
A taxable event will leave you with capital gains (profit) or capital losses. If an asset you're holding appreciates and you trade it at a profit, you've made capital gains. If you trade or sell that asset at a loss, you've incurred capital losses.
Again, whETHer capital gains are a taxable event depends on your local tax authority. You may be able to deduct capital losses from your capital gains to reduce your taxes. Your overall amount of tax depends largely on the sum of these together. To help calculate this, taxpayers should note the date, cost basis (purchase price), sale value, and fees associated with all trading transactions.
What are Taxable and Non-taxable Events?
Generally speaking, taxable events include:
1. Selling cryptocurrency for fiat currency (e.g. USD, CAD, EUR, JPY, etc.).
2. Trading cryptocurrency for another cryptocurrency (e.g. BTC for ETH).
3. Spending cryptocurrencies – In jurisdictions including the US, UK, Canada, and Australia, directly spending your crypto on goods or services can incur taxes if you made profits.
4. Receiving cryptocurrency as a result of a fork, airdrop, or mining.
On the other hand, the following are generally not considered taxable events:
1. Buying cryptocurrency with fiat currency (except in cases where the purchase price is lower than the fair market value of the purchased coin).
2. Donating cryptocurrency to a tax-exempt organization.
3. Gifting cryptocurrency under a specific limit.
4. Transferring cryptocurrency from one wallet you own to another wallet you own.
How is Crypto Taxed?
Bitcoin and other cryptocurrencies' official classification within a country will determine how they're taxed. Tax authorities commonly count crypto as a capital asset and not a currency. If your country hasn't passed specific crypto taxation laws, expect your crypto profits to be taxed according to their official designation (if any). Some jurisdictions take a much simpler approach. Germany, for example, has no tax on crypto held for over a year. Malaysia, Portugal, and Singapore also have very liberal crypto tax rules.
Your Bitcoin or crypto income may also count as income tax. If you're a full-time employee, freelancer, or crypto trader paid in crypto, you’re likely liable to pay income tax on your crypto earnings. Again, the income tax rate usually depends on the amount you earn.
Under a certain income threshold, you might pay no tax on your income. You'll typically find different income brackets, with increasing higher brackets paying higher tax rates. If your primary income comes from trading, find out if you're subject to capital gains taxes or income tax.
What Happens if I Don’t File my Crypto Taxes?
In many countries, tax authorities require you to file your taxes regularly. This can be the case even if you owe zero taxes or need a refund. Failure to file can result in fees, penalties, interest, confiscated refunds, audits, and even jail time.
How Do Tax Authorities Know About My Crypto?
Tax authorities such as the IRS, ATO, CRA, HMRC, and others track cryptocurrency transactions and enforce tax compliance. Large cryptocurrency exchanges also cooperate with authorities.
Governments use data analytics tools such as Chainanalysis to pinpoint cryptocurrency users. With enough information, they can tie blockchain transactions from regulated cryptocurrency exchanges to personal crypto wallets. These analytics even include multiple layers removed from exchanges to combat tax evasion.
The IRS and other tax authorities also partner and share data with other governmental bodies, academic institutions, and international governments to share information about cryptocurrency usage.
Closing Thoughts
Getting your taxes right is essential. Despite understanding what is a taxable event in crypto and how is crypto taxed having read this article, we recommend getting professional help calculating your tax bill if you have any doubts.
This may be the case if you’ve been trading and not just investing as the tax implications of regular trading are much more complicated. But most importantly, your situation for tax purposes is highly dependent on where you live. Make sure to use our information with that in mind.
