Cryptocurrency Taxation: A Guide

Most investors around the globe will soon face the deadline for filing their annual tax returns. This means only one thing: it’s time to get your cryptocurrency tax obligations in order. The fiscal policies on taxing cryptocurrency in various regions are governed by how each nation defines virtual сoins. While the United States classifies it as property, Great Britain -as a capital asset, and Italy -as foreign currency, Malta, El Salvador, Malaysia, and Singapore either do not impose cryptocurrency taxation or allow you to be exempt from it under specific circumstances. This guide provides an overview of global tax policies on virtual assets.

Introduction to Crypto Taxation

Primarily, cryptocurrency trading was portrayed as a secure and anonymous performance, preventing fiscal authorities from monitoring taxable transactions. This led to negative outcomes for individuals and states, as stolen cryptocurrency couldn’t be reported to the police due to the anonymity of transactions. This lack of transparency also resulted in decreased tax payments at a national level, impacting state budgets.

To combat fraud in the digital asset realm, many countries have started developing legislation requiring the collection and disclosure of data on taxable transactions. In 2013, the United States, Singapore, Switzerland, and Germany were among the first countries to address cryptocurrency regulation and taxation. Each country requires specific laws to regulate cryptocurrency transactions. However, the absence of cryptocurrency legislation does not necessarily indicate illegality. Taxes are typically calculated following existing tax regulations or guidance from tax authorities.

Understanding Taxable Crypto Transactions

One common taxable event involving cryptocurrency is selling digital assets for fiat currency (e.g., U.S. dollars). To determine the gain or loss, calculate the difference between the cryptocurrency’s fair market value at the time of sale and its cost basis (original purchase price). If you’ve held the cryptocurrency for over a year before selling, you may qualify for a lower tax rate as a long-term capital gain.

Using cryptocurrencies for purchases is another taxable event. Despite appearing insignificant, this transaction involves managing your digital assets and requires reporting any resulting gains or losses for tax purposes.

Taxable events also arise from staking and mining cryptocurrencies. Staking involves holding digital assets to validate transactions on the blockchain network and earn rewards. Likewise, profits from cryptocurrency mining (using high-performance computers to solve complex mathematical problems and generate new coins) should be reported as taxable income.

Additionally, exchanging one cryptocurrency for another counts as a taxable event, necessitating the reporting of any gains or losses on your tax return.

Are All Crypto Transactions Taxable?

However, the good news is that deals with cryptocurrency and taxes do not always meet each other. In general, you will not have to pay taxes for such cryptocurrency activity:

• Buying cryptocurrencies for fiat;
• Transferring cryptocurrencies between your private wallets – although in this case, transaction fees may be considered asset disposal;
• Simply holding cryptocurrency or so-called hodl. The exception may be jurisdictions with a wealth tax;
• A gift of cryptocurrencies to someone else – however this item depends on where you live;
• Donation of cryptocurrencies to a registered charitable organization.

Reporting Gains and Losses

When an investor disposes of an asset including cryptocurrencies he gets a capital gain or loss. In the case of a gain, capital gains tax will be levied. Getting rid of crypto-assets can be done in the following ways:

• Sell cryptocurrencies in exchange for fiat, i.e. US dollars, pounds sterling, and so on;
• Trade one cryptocurrency for another crypto asset, including stablecoins, tokens, and NFTs;
• Spend cryptocurrencies on a good or services;
• Donate crypto – however, this point differs from country to country.

Losses also bring advantages, as they can be used to offset taxes, thus reducing the total amount of the latter. In some countries, such as the United States, losses can also be offset against ordinary income.

Tax Forms Issued by Crypto Exchanges

One of the most confusing aspects of reporting cryptocurrency taxes for many people is determining which tax forms to use. Your transactions on Kraken, Binance, Coinbase, and other platforms are subject to income tax and capital gains tax in the United States. Internal Revenue Service (IRS) tax forms serve an important function in the tax collection process. They act as standardized documentation for taxpayers to report their profit, expenses, and other financial data.

The key IRS tax forms for individuals:

• Form 1040: U.S. personal income tax return for individuals;

• Form 1040-ES: Estimated Tax for Individuals.

The main IRS tax forms for businesses:

• Form 1120: U.S. Corporation Income Tax Return;

• Form 1065: U.S. Partnership Income Return.

IRS Specialised Tax Forms:

• Form 1099-MISC: Other Income;

• Form W-2: Wage and Tax Statement.

Tax forms for tax credits and deductions:

• Form 8863: Education Credits;

• Schedule A (Form 1040): Itemised Deductions.

Understanding tax extensions and amendments:

• Form 4868: Application for automatic extension of time to file a U.S. individual income tax return;

• Form 1040-X: Amended U.S. Individual Income Tax Return.

You may also need to complete Form 1099-INT to receive interest or staking rewards from holding certain cryptocurrencies on a decentralized funding platform (DeFi). If you received any coin giveaways or forks during the tax year, you must report it as ordinary income on Form 1040.

As of 1 January 2024, the New Tax Reporting Act came into effect in the USA. All Americans who receive $10,000 or more in cryptocurrency as part of their trade or business must file a report with the IRS within 15 days, otherwise, they could be convicted of a felony.

Understanding Crypto Tax Rates

Cryptocurrency tax regulations in the United States are currently under review. There is a divergence of opinions among American regulatory bodies regarding the classification of cryptocurrency. For instance, the Internal Revenue Service (IRS) categorizes digital assets as property, the U.S. Securities and Exchange Commission (SEC) views Proof of Stake (PoS) coins as potential indicators of unlawfully issued securities, and the Commodity Futures Trading Commission (CFTC) identifies cryptocurrency as a commodity. Despite these varying perspectives, there is a consensus among regulators that Americans are obligated to declare income from cryptocurrency and pay taxes accordingly. Notably, in the U.S., the use of cryptocurrency for purchasing goods and services is permissible. Furthermore, American legislation does not prohibit the utilization of cryptocurrency in transactions involving exchanges.

How is cryptocurrency taxed? In the US, transactions involving virtual assets are subject to personal income tax or capital gains tax. The first one is calculated based on a number of factors, including the amount of income and marital status. The higher the income is the more will be claimed by the tax office. The capital gains tax is applied in the case of growth in the rate of cryptocurrency, which is held by a member of the crypto community. We will dwell on the figures in more detail in the section below. 

In EU countries the tax rates on crypto are also different these days. They do not have a common fiscal system, unlike the monetary one. But basically, the rating scale is progressive. On average, it’s around 15-20% on crypto income for individuals and 25-30% on crypto income for businesses.

Offset Capital Gains with Losses

How can investors offset capital gains with capital losses?

The IRS allows investors to claim deductions on cryptocurrency losses that can lessen their tax liability or potentially result in a tax refund. Crypto losses must be reported on Form 8949; you can use the losses to offset your capital gains—a strategy known as tax-loss harvesting—or deduct up to $3,000 a year from your ordinary income (the allowable capital loss deduction).

When offsetting your capital gains with losses, pay attention to the holding period of the assets in the red. You can only offset long-term capital losses against long-term capital gains and short-term capital losses against short-term capital gains. Once you’ve offset losses of the same type, your short-term losses are used first against your allowable capital loss deduction of $3,000. If you have not reached the limit on the capital loss deduction after using your short-term losses, use your long-term losses until you reach the limit. Any remainder above $3,000 will be carried forward into the next year, retaining its long- or short-term character.

Enforcing Crypto Taxes

As the popularity of cryptocurrencies continues to rise, governments around the world are working to ensure that individuals and businesses are properly reporting and paying taxes on their crypto transactions. Enforcing crypto taxes has become a priority for tax authorities as they seek to close any potential loopholes in the tax system.

To enforce crypto taxes effectively, tax authorities are implementing various strategies such as increasing awareness about tax obligations related to cryptocurrencies, conducting audits, and collaborating with cryptocurrency exchanges to gather data on transactions. Additionally, some governments are considering introducing new regulations specifically tailored to the taxation of cryptocurrencies.

It is essential for individuals and businesses involved in crypto transactions to stay informed about their tax obligations and to keep detailed records of their crypto activities. By complying with tax laws and regulations, individuals can contribute to the overall legitimacy and sustainability of the cryptocurrency market.

Enforcing crypto taxes is an evolving process that requires cooperation between taxpayers and tax authorities to ensure a fair and transparent taxation system for all parties involved.

Complexities in Crypto Taxation

International regulation creates additional challenges due to differences in legislation between countries. The anonymity and decentralization of cryptocurrencies complicate tax administration, and uncertainty in reporting and income declaration requirements exacerbates these problems. So far, there is no clear distinction, nor are there rules according to which a certain cryptocurrency can be classified as a commodity or a security.

There is unity in only one issue – most countries recognize Bitcoin as a commodity, i.e. it can be used as a means of payment. All other cryptocurrencies are actually in a grey area.

Some of the most elaborate legal bases for taxation of the crypto community are in the UK, Switzerland, and Singapore. The authorities of the countries have provided representatives of the crypto industry with detailed instructions. The worst taxation of the crypto community is solved in countries such as China.

How to Report Crypto on Taxes

In the USA the IRS has announced that Bitcoin should be treated as property. The agency believes that anyone who owns cryptocurrency will have to determine its value at the time of receipt so that by the time they file, they can determine gain/loss, and file with the appropriate results. 

If you were mining Bitcoin, the equivalent of the market value of the cryptocurrency on the date of mining is gross income. If you are paying someone in Bitcoin, you must file the appropriate document.

Cryptocurrency brokers, including exchanges and payment processors, will have to report new data on sales and exchanges of digital assets by users to the IRS.

The agency also unveiled a new tax form that cryptocurrency companies will have to fill out. Miners are exempt from the tax rules, but some decentralized financial platforms will not be affected, the ministry’s guidance notes.  Brokers of digital assets will be subject to the same rules on reporting user transaction data as traditional brokers.

US presidential candidate Robert Francis Kennedy Jr. said he would exempt the conversion of Bitcoins into US dollars from capital gains tax in case of his victory in the elections.

Crypto Tax Rates for 2023 and 2024

For example, we will consider how is crypto taxed in the USA. 

Cryptocurrency is legally considered property in the United States and its taxation depends on whether the investment is long- or short-term and the amount of profit or loss that an investor has realized. If the investor does not sell the cryptocurrency for more than a year, it is considered a long-run investment. In this case, the taxation is 15%, starting with the amount of profit made from $47,026 ($44,626 in 2023) for a single, $94,051 ($89,251 in 2023) for married filing jointly, and $63,001 ($59,751 in 2023) for a head of household. 

The tax rate will be increased to 20% if the cryptocurrency has generated >$518,900 for a single, >$583,750 for married filing jointly, and >$551,350 for the head of household (in 2023 the sums in these categories amounted to >$492,300, >$553,850, >$523,050 respectively).

Short-term investments in cryptocurrency (up to one year) are considered an ordinary income of an individual and the profit from them is subject to tax rates ranging from 10 to 37% depending on the amount of profit gained. The minimum tax rate (10%) applies if profits do not exceed $11,600 for a single ($11,000 in 2023), $23,200 for married filing jointly ($22,000 in 2023), and $16,550 for a head of household ($15,700 in 2023). The topmost tax rate (37%) applies when profits exceed >$609,350 for single ($578,125 in 2023), >$731,200 for married filing jointly (>$693,750 in 2023), and >$609,350 for head of household (>$578,100 in 2023). Non-fungible tokens (NFTs) classified as collectibles could face a tax rate of 28%.

Conclusion

Taxation and legalization of cryptocurrency income is a complex and dynamically evolving area. Laws have not kept pace with the tempo of cryptocurrency popularisation in the world. Selling virtual coins can have tax consequences and crypto-enthusiasts face uncertainty about the tax status of cryptocurrencies and the diversity of international regulations. These challenges require the development of effective tax administration mechanisms to ensure tax transparency and fairness.

Although regulators in many countries have been working for a long time to develop a regulatory framework for cryptocurrency taxation, a universal solution remains elusive. The authorities of many lands are guided by the experience of their foreign colleagues when drafting legislation. Regulation of the digital asset market in multiple countries largely depends on local laws and the attitude of the authorities to the new financial instrument. Regulators agree on one thing: the crypto community should be taxed.

FAQ

Is there a minimum threshold for reporting cryptocurrency taxes?

All revenues from virtual currency transactions must be reported to the IRS, regardless of the size. Even small gains and losses should be disclosed in tax filings to reflect capital gains and potentially reduce taxable amounts accurately.

How are cryptocurrency mining and staking rewards taxed?

In general, tax authorities in different states have miscellaneous ways of assessing what is considered income, with some authorities being very strict. However, cryptocurrency-related activities such as staking remuneration and receiving a reward for mining will most often be subject to income tax.

Can I use cryptocurrency for purchases without incurring taxes?

Taxation is not invocated to storing and buying cryptocurrency for fiat currencies, donating to philanthropy, giving or obtaining crypto as a handsel (depending on the amount and region), or addressing your own assets from one storage to another.

Disclaimer: Please keep in mind that the content of this article is not financial or investing advice. The information provided is the author’s opinion only and should not be considered as direct recommendations for trading or investment. Any article reader or website visitor should consider multiple viewpoints and become familiar with all local regulations before cryptocurrency investment. We do not make any warranties about reliability and accuracy of this information.