The surge in the price of Bitcoin caused people to hop on to the bandwagon without realizing that the investment, like other types, is not exempt from taxation.
In most countries, when the tax season comes about, investors have to file. Unfortunately, filing cryptocurrency taxes appears complex for many people. There is also another camp that sees crypto as a way to move illegal money, avoiding taxes entirely.
As the virtual currency becomes mainstream and governments are focusing on digital assets, it is now, essential to know how to pay cryptocurrency tax and to understand how different countries interact with the matter.
Note that while regulations vary, the following hold in most countries:
- All crypto sales and trades are taxable -You have to report losses and gains on all trades and more so when exchanging digital currencies or converting them.
- Failure to pay taxes is considered fraud – In the US, for example, avoiding paying cryptocurrency taxes can result in a five-year prison sentence.
- Miners are taxed – Cryptocurrency miners will pay taxes on their earnings. Mining is also considered as self-employment in some places, and so the rules for self-employment apply.
- Not all crypto-related activity is taxed – In some countries, the investor will not be taxed for buying and holding crypto.
Preparing for tax returns
When preparing for the tax season, remember that it is your responsibility to keep your cryptocurrency record. Be sure to know all your transactions and trades. Record the market value of your cryptocurrency when you are 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 at all, as you could be eligible for tax relief.
The following is how some countries handle cryptocurrency taxation:
The United States
The US treats all cryptocurrencies like capital assets like bonds, property, and stocks. This means that the assets will be subjected to ‘Capital gains tax’ without regard for 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 the USD. However, holding the currency for more than a year will make it applicable for long-term capital gains tax. If you want to understand more on this, consider interacting with this bitcoin tax guide.
In Europe, most countries do not have specific laws for taxing cryptocurrencies. However, crypto will comply with general local tax authority principles.
In France, for example, tax authorities consider cryptocurrency profits as capital gains. They will require a 19% tax and a 17.2% fee for social contribution. Profits that come from cryptocurrency mining will be treated as commercial and industrial gains, earning a 45% tax.
In Germany, cryptocurrency is considered an asset. The taxation scope varies depending on whether it is a business or private asset. Cryptocurrency held like a private asset will receive 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.
In Sweden, exchanging or selling cryptocurrencies is subjected to a fixed capital gains tax of 30%. Mining cryptocurrencies is treated as income from employment or as business income and is taxed under the respective category.
Businesses that are based in Singapore that trade in cryptocurrencies are taxed on profits. The profits are treated as income. Individuals and companies who hold the digital currencies as long term investments receive no taxation because there is no capital gains tax in Singapore.
Cryptocurrency tax laws are not yet defined in India, but the country is taking a different approach. Instead of thinking of the digital currencies as foreign or as assets like in most states, India places cryptocurrencies under ‘goods and services.’ They become applicable for 18% goods and service tax. This model is still in discussion. The Indian government has been skeptical about cryptocurrency and has banned its use in financial institutions.
There are more countries than this post covers. However, taxation falls into three different categories. Most early-adopters of crypto regulation tax, based on income. They view digital currencies as a source of corporate and personal income, taxing it like money from commerce, production, and employment. Mining and trading earnings are considered ‘other.’ Germany is an example of such.
The second group of countries taxes based on capital gains. Capital gains tax works by assuming that cryptocurrency is a foreign currency. In most cases, only the amount you gain via investment is taxed. As a rule, capital gains and property tax are treated more favorably than income, sometimes even reaching tax exemption. France falls under this category.
Countries like Singapore, India, and Sweden do not conform to the two classifications because they define cryptocurrencies differently, or because they embrace controversial approaches to the currencies. Cryptocurrency taxation is not universally agreed upon, and no wonder 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 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.