Do You Pay Tax on Cryptocurrency?
All you need to know about crypto tax in 2021
July 5, 2021
As I'm sure you're well aware, it's tax time!
I'm sure you've been wondering, "Do you pay tax on cryptocurrency?"
The short answer is yes... but there are some exclusions and important things to know before launching your tax report.
In this article, I will explain EXACTLY how crypto tax is calculated in each country and how you can calculate your crypto tax completely stress-free!
Let's take a look...
So, Do You Pay Tax on Cryptocurrency?
Yes... However, not many tax clauses exist concerning cryptocurrency, which leads to the IRS deciding to consider it as a property.
Therefore, the cryptocurrency taxation process would be similar to that of a regular property tax.
To achieve the correct base income for the tax to be charged, you need to identify the cryptocurrency's fair market value, that too, in dollars.
It will easily convert your cryptocurrency into traditional money so that it can be taxed afterwards.
How Gains and Losses Affect Crypto Tax
Taxes are charged on taxable income, which fluctuates following the gains or losses that have been incurred.
Similarly, the profit from cryptocurrencies adds to your taxable income, while the loss lowers it.
If you manage to invest in a cryptocurrency and then sell it off, the difference between your buying and selling price would be considered as gain/loss.
Since cryptocurrency is viewed as a capital asset, it is termed as ‘capital gains/losses'.
These gains and losses are adjusted to your taxable income accordingly while deducting any tax exemptions.
What's the Easiest Way to do your Crypto Tax?
Without a doubt, the easiest way to do cryptocurrency tax is by using a crypto tax agent. Using a crypto tax agent is stress-free and will maximise your tax return.
The best crypto tax agent on the current market would have to be CryptoTraderTax.
CryptoTraderTax automatically integrates with your cryptocurrency exchange, staking/mining platform and calculates your cryptocurrency tax to get you the best possible returns.
In my opinion, this Is the easiest and most stress-free way to do cryptocurrency tax.
The best part? Their fees are tax-deductible, which means you'll get most of the initial fee back with your tax return!
Crypto Tax Per Country
When it comes to taxation, the comparison is always a good indicator.
So, we had to choose between several countries.
In this article, the main purpose is to present the crypto tax regimes of different countries.
The tax systems presented are consecutively those of Germany, China, the United States, Japan, the United Kingdom, Australia, Russia and Switzerland.
Cryptocurrency Tax in the US
How Do Crypto Taxes Work in the United States?
While the US tax system is the most comprehensive, it is also the most complex.
Indeed, it is in the United States that all derivatives of bitcoin such as futures have been developed.
So, do you pay tax on cryptocurrency in the US?
This means that there are several tax systems to study and differentiate.
Above all, taxation is primarily the responsibility of the States, which could have complicated the study with 50 tax laws to be examined.
Fortunately, there is in fact a document applicable to the entire U.S. territory that determines the taxation of capital gains in cryptocurrencies.
Finally, unlike any other state in the world, an American cannot escape taxation in his country, regardless of where he lives.
Are Crypto Gains Taxed in the US?
The Internal Revenue Service (IRS) Notice 2014-21 is quite clear, especially its section 4, and gives all the tax references to help determine the tax rate.
In the United States, gains in cryptocurrencies are taxed as property.
It is a bit of a hybrid between real estate and movable property, represented in particular by shares.
If the capital gain is made after more than one year of ownership, it is taxed at 0%, 15% or 20% depending on the total income received by the individual.
Up to $39,375, the individual is exempt from taxation. For income between $39,376 and $434,550 (single person), taxation is 15%. For all higher incomes, it is 20%.
If the capital gain is realized after less than one year of ownership, the tax is a one-time tax of 25% of the capital gain.
Finally, let's end on a good tax note: gains of less than $600 are tax-free.
However, the taxation presented above only concerns classic capital gains, for example, those made on an exchange like Kraken or Coinbase.
Indeed, the American particularity lies in futures or other stock market trackers which are subject to a completely different taxation.
If capital gains are considered as property, futures and trackers are commodities.
On this point, the American taxation is very complex and is based on the Section 1256 Contract.
I will not go into the details of this taxation, but simply remember two things:
On one hand: The taxation is higher than that of capital gains on an exchange (between 26.8% and 37%)
On the other hand: This taxation benefits traders rather than those who keep their investment for a long time.
Cryptocurrency Tax in the UK
How Do Crypto Taxes Work in the UK?
The British have a fairly clear tax law that is very well explained by the government.
It is also extremely detailed since crypto-assets are divided into three categories: exchange and payment in cryptocurrencies including mostly bitcoin (exchange tokens), tokens exchangeable on a dedicated blockchain such as ether (utility tokens), tokens allowing to invest in a company and mostly issued from ICOs (security tokens).
The tax legislation is so detailed that it would be annoying to list everything.
Are Crypto Gains Taxed in the UK?
So, do you pay tax on cryptocurrency in the UK?
Yes... Individuals generating capital gains in crypto-assets are taxed twice: social security contributions (National Insurance contributions) and income tax (Income Tax).
Indeed, in the case of capital gains after the sale of crypto, the tax rate is set at 10% up to £34,500, 20% beyond.
But individuals are taxed if the gains are (very) large since any gain up to £11,700 is exempt!
Concerning traders, the British tax authorities are really clear since they give the criteria for distinguishing between residual activity (individuals) and usual activity (traders).
An activity is usual when the person trades frequently, in a very organized and sophisticated way.
If the exact number of transactions is not specified, it is easier to consider the level of organization and sophistication.
For minors, it depends on your status. Unlike in Europe, there is no obligation to register.
If mining is a hobby, the person is taxed as an individual.
If the person has a lot of expenses, it is better to register as a company, with a VAT number, or as an auto-entrepreneur, also taxed as an individual.
The first option is preferred when the person starts to earn a lot of money from mining.
On one side, the fixed tax rate is 19% and on the other side, the VAT paid for electricity bills is redistributed to the registered company.
Cryptocurrency Tax in Australia
A Capital Gains Tax (CGT) event occurs when you sell your cryptocurrency.
This may include:
-Sell or give away cryptocurrencies
-Trading or exchange cryptocurrencies (including the sale of one cryptocurrency for another cryptocurrency)
-Converting cryptocurrencies into fiat currencies (a currency set by regulation or government law) such as Australian dollars or use cryptocurrencies, to receive goods or services.
If you are making a capital gain from the sale of cryptocurrencies, some or all of the profit may be taxable.
A cryptocurrency that is an asset for personal use is not counted.
If the sale is part of a business you operate, the profits from the sale should be recognized as ordinary income and not as capital gains.
Here's the Official ATO Cryptocurrency Tax Document.
Cryptocurrency Tax in Germany
How Do Crypto Taxes Work in Germany
German taxation considers crypto-assets as private currencies, a provision from the German Tax Act (Einkommensteuergesetz, abbreviated as EStG) and its section 23.
It is therefore neither a commodity like gold nor equated with a share as in France. The German legislation on these private currencies is very advantageous.
So, do you pay tax on cryptocurrency in Germany?
In simple terms, a private currency is a currency that is not regulated by the state, that is not authorized to be put into circulation on the market and that is the result of the sole will of at least two natural persons to exchange said private currency.
Germany allows two people to exchange pretty much what they want as long as it is not something illegal. Crypto-assets fit perfectly into this category.
Are Crypto Gains Taxed in Germany?
In Germany, any private currency transaction not exceeding the sum of €600 is tax-free.
This limit may seem restrictive when you have a large amount of money to convert to euros. In addition, taxation can be high depending on income if the sale is made less than a year after the purchase.
But, to avoid this, you just have to wait one year and you will be totally exempted, no matter the amount of the transaction!
This exemption applies up to 10 years between the purchase and the sale.
The exemption is therefore not absolute.
Nevertheless, it is so easy to obtain that it would not be appropriate to make a transaction of more than 600 euros in the first year and more than 10 years after the purchase.
Finally, it should be noted that these are private transactions.
Therefore, this legislation cannot apply to traders or any other person who will make transactions in cryptocurrencies in a professional context.
Cryptocurrency Tax in Switzerland
How Do Crypto Taxes Work in Switzerland?
The neutral country is not really neutral when it comes to crypto-assets.
Switzerland is considered a paradise for cryptophiles.
As proof, it is quite possible to see bitcoin-related advertisements at the airport in Zurich!
In Switzerland, there are "Bitcoin ATMs" and the canton of Zug was even the first authority in the world to allow the payment of local taxes in BTC!
This canton is part of the Crypto Valley, a real Garden of Eden for crypto entrepreneurs.
Are Crypto Gains Taxed in Switzerland?
As a direct consequence, Swiss taxation is very light, if not absent.
Indeed, when capital gains are generated as an individual and private activity, the individual is exempt from taxation, regardless of the amount of the capital gain.
Only very (very) high incomes are subject to wealth tax, which is set by canton. The average rate is... 0.03 %!
But Switzerland is not a paradise for everyone. Minors, as auto-entrepreneurs, are subject to income tax.
As the tax rates are determined at the level of the cantons, we will not make a study for each of them.
Keep in mind that the observed rates generally range from 0% for low incomes to 30% for very high incomes, some cantons being more attractive than others, such as Zug, which will surprise no one.
Add to that a federal tax of up to 11.5%. Not much of a paradise!
Traders are subject to corporate tax as a sole proprietorship. The federal tax is a flat rate of 8.5%.
The cantonal tax varies considerably, but keep in mind that the total amount of tax is much lower than in many countries.
Cryptocurrency Tax in Russia
How Do Crypto Taxes Work in Russia?
To date, there is no legislation that legislates taxation related to crypto-assets. Nevertheless, in May and July 2018, the Ministry of Finance stated in two separate documents that capital gains in crypto-assets are subject to income tax.
Are Crypto Gains Taxed in Russia?
The Russian taxpayers are required to declare their gains except in special cases. However, the rate is really low: 13%.
Cryptocurrency Tax in Japan
How Do Crypto Taxes Work in Japan?
Japan is a country of technophiles. Bitcoin and other cryptocurrencies have therefore become established (easy pun...) in the land of the rising sun and have even become a completely legal means of payment.
This legality is important to note because in the other countries mentioned, it is not a legal means of payment but a financial instrument.
Of course, the tax authorities quickly realized the financial windfall that crypto-assets could bring.
Are Crypto Gains Taxed in Japan?
In Japan, crypto-assets are considered commodities.
Both individuals (income tax, capital gains on securities) and companies (corporate tax) are subject to taxation.
It would be tedious to list all the rates. Just remember that the tax rate varies between 15 and 55% depending on income.
In addition, given the use of crypto-assets in Japan, it is, therefore, an important source of revenue for the Japanese state.
Last but not least, crypto/yen conversions are also taxed.
Also, the Japanese government is keeping a close eye on crypto-asset users in order to monitor possible tax evaders.
Apparently, this works quite well.
Cryptocurrency Tax in China
China has a very ambivalent relationship with cryptocurrencies.
On one hand, although it is increasingly less the case, the vast majority of mining farms are located in China, due to the very low cost of electricity.
On the other hand, trading cryptocurrencies is illegal!
So the government has never ruled on the taxation of something illegal and it's probably better for cryptocurrency owners in China to keep this a secret to themselves.
Best and Worst Country for Crypto Taxes
- The Best Country
While not everyone is tax-free, Switzerland is the most favourable major country for the crypto world.
While private individuals are as well licked in Germany, it is on the side of professionals that Switzerland takes the advantage with rates largely lower than those observed in Germany.
This is why the Crypto Valley is located in Switzerland.
- The Worst Country
You all have the same country in mind... Japan! It has the highest potential rate.
Not forgetting that the cyrpto / yen conversion is also taxed, a double taxation that is unique and does not even exist even in the U.S.!
Yet it is only in Japan that bitcoin is considered a legal means of payment.
How to Calculate Crypto Taxes
Now, the question arises - How much tax do I have to pay on my crypto?
This question depends on the value of your total taxable income.
Every country has a set-aside calculation policy regarding taxes, and the percentage of tax payable ranges to various amounts depending on your net taxable income.
Once you have calculated your capital gain/loss due to a cryptocurrency transaction, that gain/loss amount is considered as ordinary income afterwards.
It means you can view that as income from fiat money and move forward with your tax calculations.
Even though converting the cryptocurrency into fiat using fair market value can be a tiresome task, the rest of the procedure is moderately easy!
Crypto Trader Tax integrates directly with your favourite cryptocurrency platforms to make it easy to import your historical transactions.
Maximise your tax return by using this incredible crypto tax tool.
Crypto Tax FAQ
Most of the time, cryptocurrency taxes cause confusion; they even drive some of the investors away!
For a digitalized currency, how is the tax calculated? On what basis?
The simple answer to this question is to generally apply cryptocurrency to the existing capital gain/losses laws.
The declaration of cryptocurrency to be regarded as the property has somewhat made the calculation of taxes manageable, if not easy.
Hence, the trick to avoid a mess while identifying your cryptocurrency tax is to convert it into traditional money.
Due to cryptocurrency being a fairly new concept, most of the world still hasn’t caught up with its rapid evolution.