The surge in the price of Bitcoin has led many to jump on the bandwagon without realizing that, like other investments, it is not exempt from taxation. In most countries, when tax season arrives, investors must file their taxes. Unfortunately, filing cryptocurrency taxes can appear complex for many people. Additionally, some see crypto as a way to move illegal money, avoiding taxes entirely.
As virtual currency becomes mainstream and governments focus on digital assets, it is essential to know how to pay cryptocurrency tax and understand how different countries handle the matter.
General Tax Principles for Cryptocurrencies
While regulations vary, the following principles hold in most countries:
- All Crypto Sales and Trades Are Taxable: You must report losses and gains on all trades, especially when exchanging digital currencies or converting them.
- Failure to Pay Taxes Is Considered Fraud: In the US, for example, avoiding cryptocurrency taxes can result in a five-year prison sentence.
- Miners Are Taxed: Cryptocurrency miners must pay taxes on their earnings. Mining is also considered self-employment in some places, so self-employment rules apply.
- Not All Crypto-Related Activity Is Taxed: In some countries, investors are not taxed for buying and holding crypto.
Preparing for Tax Returns
When preparing for tax season, remember that it is your responsibility to keep your cryptocurrency records. Be sure to know all your transactions and trades. Record the market value of your cryptocurrency when buying or selling; otherwise, you will be taxed on the current value, which could raise your tax bill. Take note of your trade dates, how much you paid/sold for, the net loss or gain, and the cost of trading.
Understand the tax laws of your country on cryptocurrency and account for charitable donations, if applicable, as you could be eligible for tax relief.
How Different Countries Handle Cryptocurrency Taxation
The United States
The US treats all cryptocurrencies like capital assets, similar to bonds, property, and stocks. This means that the assets are subjected to capital gains tax regardless of how you use them. Trading digital currency for fiat is considered taxable, as is trading crypto. In the latter, you will be taxed based on the market rate when you traded.
Using cryptocurrency to get services or goods is also taxable based on the market value at the time of the trade. You will not be taxed for gifting someone digital assets within the gift tax threshold, transferring crypto from wallet to wallet, and buying the currency using USD. However, holding the currency for more than a year makes it applicable for long-term capital gains tax.
Europe
In Europe, most countries do not have specific laws for taxing cryptocurrencies. However, crypto complies with general local tax authority principles.
- France: Tax authorities consider cryptocurrency profits as capital gains, requiring a 19% tax and a 17.2% fee for social contribution. Profits from cryptocurrency mining are treated as commercial and industrial gains, earning a 45% tax.
- Germany: Cryptocurrency is considered an asset. The taxation scope varies depending on whether it is a business or private asset. Cryptocurrency held as a private asset receives a capital gain tax of 30.5%, applicable only if the sale and purchase took place in less than a year. Germany has removed bitcoin transactions from VAT.
- Sweden: Exchanging or selling cryptocurrencies is subjected to a fixed capital gains tax of 30%. Mining cryptocurrencies is treated as income from employment or business income and is taxed under the respective category.
Singapore
Businesses based in Singapore that trade in cryptocurrencies are taxed on profits, which are treated as income. Individuals and companies holding digital currencies as long-term investments receive no taxation because there is no capital gains tax in Singapore.
India
Cryptocurrency tax laws are not yet defined in India, but the country is taking a different approach. Instead of viewing digital currencies as foreign or as assets like in most states, India places cryptocurrencies under ‘goods and services,’ making them applicable for an 18% goods and service tax. This model is still under discussion. The Indian government has been skeptical about cryptocurrency and has banned its use in financial institutions.
Conclusion
There are more countries than this post covers. However, taxation generally falls into three categories:
- Income-Based Taxation: Early adopters of crypto regulation tax based on income, viewing digital currencies as a source of corporate and personal income. Mining and trading earnings are considered ‘other.’ Germany is an example of such.
- Capital Gains Taxation: This assumes cryptocurrency is a foreign currency. In most cases, only the amount gained via investment is taxed. Capital gains and property tax are treated more favorably than income, sometimes even reaching tax exemption. France falls under this category.
- Unique Approaches: Countries like Singapore, India, and Sweden do not conform to the two classifications because they define cryptocurrencies differently or embrace controversial approaches to the currencies.
Cryptocurrency taxation is not universally agreed upon, and taxation will vary by country. It is worth remembering that investing in cryptocurrency is highly speculative and that cryptocurrency taxes are still in flux. You will have to do a lot of work in keeping your records and plan to repeat it every year you keep investing.
There is also plenty about taxation that is yet to be figured out. For example, many countries are unclear about how to handle tokens and cryptocurrency airdrops. It is a good idea to consider using crypto tax software when preparing to file your returns.
