Although cryptocurrencies are not controlled by any government or bank, the same cannot be said about crypto-related financial operations. Whether we like it or not, the number of countries introducing taxes on crypto profit is growing, so our expenses are not limited by just the transaction fees. Today we discuss the size of Bitcoin & cryptocurrency taxes, and when those have to be paid.
Legal and Tax definition of cryptocurrency
The legal status of cryptocurrency varies from country to country. While some of them ban mining and operations with cryptocurrency, equaling them to crime, others do not impose taxes and do not consider crypto to be personal financial assets at all.
As a rule, crypto assets are generally treated as either a good or an investment asset and are subject to the relevant legislation for tax purposes. Sometimes Bitcoins are recognized as a unit of account (e.g. in Germany), in other countries (e.g. in Japan) Bitcoin is a legal tender with purchase tax. In other countries (e.g. China), Bitcoin transactions are prohibited for banks but allowed for individuals. China is the leader in mining due to it having the largest production capacity.
In Switzerland, cryptocurrencies are subject to the same rules as foreign currencies, and this country has one of the most favorable jurisdictions for Bitcoin start-ups and public blockchains. There are no restrictions on the use of Bitcoins in Russia right now, but the government does have plans to introduce some future legal regulations. Recently (16 March 2020) the Central Bank of Russia announced the beginning of work on a new bill to prohibit the issuance and organizing cryptocurrency circulation.
In a number of countries, such as France and India, governments have not yet made a formal decision on the regulation of cryptocurrencies. While they are still thinking about which side to take, they warn potential users about high risks of investing in crypto due to its high volatility.
Tax Software for Cryptocurrency
Figuring out crypto taxes is one of the most distressing parts of being a crypto trader. It takes boatloads of time to provide details for your crypto taxes, as you need to report the number of coins you have, the number of exchanges you’ve done, and the trading platforms you use. Every one of your exchanges should be recorded, making it a very tedious procedure.
Luckily, you can simplify the process with the help of crypto task software. The most popular solutions include the following.
TokenTax
TokenTax is probably the simplest way to report your cryptographic money operations and income taxes. Rated by Forbes as the best platform for documenting digital money taxes, TokenTax is the only crypto tax platform that supports all the major exchange websites. This software has a direct connection with every one of the exchange platforms to deliver automatic reposts. If an exchange does not allow data import, you can transfer a record with your exchange information to TokenTax.
When your data is transferred, TokenTax will generate the forms: all you need is to fill them out and file. Those incorporate forms 8949, TurboTax, FBAR, FATCA, and some other documents you may require.
BearTax
BearTax imports your exchange information utilizing connections with more than 25 popular exchanges to define your gains and provides the records for you to document your expenses.
The BearTax has various helpful features. The UI is clean and straightforward. Their matching feature coordinates your withdrawals and deposits over their exchanges. With this tool, the tax reports become error-free.
The platform is compatible with both decentralized and centralized platforms, but if an exchange you work with does not import data, you can simply submit it in CVS format.
CryptoTrader.tax
CryptoTrader.tax enables digital currency traders to ascertain their gains and loss quickly. Their basic interface makes it simple to import your exchange data and ensure that you’re not overpaying on your taxes.
Their software now supports Coinbase, Bittrex, Gemini, Binance, and Poloniex. CryptoTrader will compute your tax duties implementing a similar first-in-first-out technique that’s utilized by CPAs and tax experts.
Also, CryptoTrader makes a so-called audit trail that records all calculations used in the tax filing. This report incorporates a salary report, short and long sales chart, closing positions report, and so on.
Aside from the above-mentioned platforms, you can try CoinTracker or ZenLedger.
Tax Rules for Crypto In Different Countries
Crypto tax regulation differs from one region to another.
#1. Internal Revenue Service, USA
Bitcoin is considered “virtual currency” in the official World Bank and FBI reports. Bitcoin is classified as “decentralized virtual currency” by the U.S. Treasury Department’s Financial Crimes Commission.
In March 2013, FinCEN announced that the exchange of any cryptocurrencies for fiat money should be regulated in the same way as the fiat to fiat exchange (e.g., dollars for euros). In November 2013, the U.S. Senate held a hearing on Bitcoin, during which it was decided not to ban the circulation of cryptocurrencies, but to work to regulate the business.
In August 2013, a Texas Eastern District judge decided that since Bitcoins can be used as money to pay for goods or exchanged for common currencies such as the U.S. dollar, euro, yen or yuan, Bitcoin is a currency or a form of money.
On March 25, 2014, the U.S. Internal Revenue Service released a guide to the taxation of Bitcoins and other virtual currencies. For federal tax purposes, Bitcoins are considered property, i.e., those who purchase Bitcoins as an investment instrument, selling Bitcoins will generate “capital gains” rather than “foreign exchange gains”. Bitcoins are taxed. High volatility of the Bitcoin exchange rate can lead to tax liabilities for those who use Bitcoin to pay for goods and services (in particular, the obligation to pay tax on capital gains).
In the fall of 2017, the U.S. Securities and Exchange Commission (SEC) opened its first case involving the fraud with an ICO.
The Internal Revenue Service has recently published tax guidance that states that cryptocurrency should be taxed according to the same rules as any other property or capital gains. Cryptocurrency is also money, even though in a digital format only. According to the IRS, if you gain some cryptocurrency via airdrop or hard fork, you must pay tax on it (even if you did not ask for that asset transfer).
#2. United Kingdom, Canada, Australia
HMRC (Her Majesty’s Revenue and Customs) believes that only in exceptional circumstances can cryptocurrency buying/selling activities be called financial trading. In this case, the profit tax will have priority over the capital gains tax. The UK income tax rate is floating, i.e. it varies depending on the person’s income and varies from 0% to 45% depending on the sum of gains.
Most often, individuals are allowed to hold crypto assets as personal investments. In this case, they will be required to pay capital gains tax. The rate of capital gains tax in the UK also varies depending on the taxable amount and ranges from 10% to 28%.
In Canada, cryptocurrency profit is also taxed, but citizens need to pay taxes only for 50% of their gains. There are no taxes on buying or storing cryptocurrencies. Suppose you purchased some crypto coins for $1,000 and sold them later for $3,000. You would need to report a capital increase of $1,000 (half of $2,000) which would be added to your income and taxed at the marginal tax rate.
In Australia, operations involving Bitcoins and other cryptocurrencies are equaled to barter agreements. For tax purposes, Bitcoin is treated as an asset rather than a means of payment or foreign currency.
Companies conducting transactions in Bitcoin are required to document, record and date transactions accordingly. Companies that receive Bitcoin as payment should report its value in Australian dollars and it will be treated as ordinary income.
On the other hand, transactions with Bitcoin for personal use are exempt from taxation in the following cases:
- When Bitcoin is used as payment for goods and services for personal use;
- When the transaction value does not exceed $10,000 AUD.
Bitcoin mining and exchanges for commercial purposes in Australia are considered to be exchange trading and are subject to appropriate taxes.
#3. China & Hong Kong
On December 5, 2013, the People’s Bank of China banned Chinese financial companies from conducting operations with Bitcoins. At the same time, individuals can freely participate in Internet transactions at their own risk. Cryptocurrencies are treated as a commodity, but not as cash.
In Hong Kong, cryptocurrency exchanges are not banned – Chinese crypto traders often use Hong Kong platforms to cash out their digital assets. There is no capital gains tax per se. At the same time, any income from frequent transactions in the course of ordinary activities can be regarded as income for individuals and profit for corporations, and is subject to income tax and profit tax. However, according to a press release dated April 3, 2019, the Inland Revenue Department does not keep records of individuals who need to pay taxes regarding the use of virtual assets, they only examine special cases.
#4. European countries
On 22 October 2015, the European Court of Justice stated that Bitcoin exchange operations for fiat currencies are exempt from VAT. The court decision specifies that the VAT law applies to the supply of goods and services. Transactions in Bitcoins have been classified as payment transactions in currencies, coins, and banknotes, and therefore are not subject to VAT. The Court recommended that all EU member states exclude cryptocurrencies from the list of assets subject to taxation
#5. India
In April 2018, the Reserve Bank of India practically destroyed the country’s cryptocurrency industry by forcing all banks in the country to cease doing business with the cryptocurrency exchanges. However, later they changed the laws and made the following proposals:
- The purchase or sale of cryptocurrency will be considered a service.
- The value of the cryptocurrency can be determined on the basis of the transaction value in rupees or the equivalent in any freely convertible foreign currency.
- If buyers and sellers are in India, the transaction will be considered as software delivery.
- Transactions outside Indian territory will be subject to integrated GST (good and services tax) and will be treated as imports or exports of goods.
#6. Switzerland
In Switzerland, cryptocurrency operations are not taxed, though the government plans to introduce control over the crypto operations. In the nearest future, the following regulations may be introduced:
Cryptocurrencies will be considered as valuable property, so the fact of their possession should be reflected in the tax return, and their value should be taxed;
If the virtual coins are qualified as private property (i.e. they are not used for business purposes), then, in accordance with the current tax legislation, only the profit from the growing price is taxed.
Taxation of mining of Bitcoin and other coins is either corporate (profit tax) for legal entities, or in an income tax for individuals.
#7. Russia
On August 28, 2017, the Russian Ministry of Finance proposed that cryptocurrency should be considered a financial asset, but be regulated as “other property”. At the same time, the Ministry believes that the purchase and sale of Bitcoins should only be performed by ‘qualified traders’.
The Bank of Russia is against legalizing of cryptocurrencies. They are against private money, no matter its form – material or virtual. Cryptocurrencies are viewed as private digital money that must be subject to taxes.
#8. Germany
Germany has an interesting tax policy in relation to crypto. The government doesn’t consider Bitcoins or altcoins to be currency, shares or goods, however, digital assets are regarded as private property. Thus, according to law, private sales that do not exceed 600 euros are tax exempted. If you sell crypto within one year after acquiring it, you will need to pay tax for short-term gain. For longer-term gains, no taxes apply. However, you still have to report on all buy/sell operations with crypto.
#9. The Philippines
In the Philippines, there is an authority (CEZA) that regulates cryptocurrency on the territory of the country. It has released a new set of rules controlling Digital Asset Token Offering (DATO). This covers the purchasing of cryptocurrencies which includes utility and security tokens. Thus, the government aims to protect the interest of the cryptocurrency investors and at the same time promote the concept and usage of cryptocurrencies.
According to this regulation framework, all the investments in digital assets are divided into three categories:
- Investments, and assets less than $5 million
- $6-$10 million
- Over $10 million
#10. New Zealand
New Zealand’s tax authority is considering changings in cryptocurrency taxation policy.
Now Bitcoin and other cryptocurrency is a property in New Zealand. Thus, cryptocurrency is taxed 15% within the country as a part of business operations. However. it might be a problem upon subsequent application of income tax causes the problem of double taxation. the New Zealand Inland Revenue Department (IRD) is trying to make changes and deal with this problem:
Because of their innovative nature, [cryptocurrencies] will often also have different features to … other investment products. This means that some existing tax rules can be difficult to apply, involve very high compliance costs or may provide policy outcomes for some crypto-assets that lead to over-taxation compared to other alternative investment products.
Cryptocurrency Tax Free Countries
Currently, there are 6 countries where you don’t have to pay taxes for your cryptocurrency earnings:
- Switzerland;
- Singapore;
- Belarus;
- Malta;
- Portugal;
- Georgia;
- Malaysia.
Crypto and Bitcoin Taxes Calculator
You can easily figure out the cryptocurrency taxes using such online calculators as Crypto Tax Calculator, CoinTracker, Koinly, and many other similar services.
Bottom Line
Unfortunately, the vast majority of countries are aiming to control cryptocurrencies: they realize that crypto-assets pose a threat to traditional fiat currencies and the global financial system. However, the process of legalization will take many more years, so, for now, we can enjoy relative financial freedom from taxes. In most cases, regular Bitcoin users performing transactions with minor sums are not obliged to pay any taxes at all.
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