In the United States, every crypto-to-fiat or crypto-to-crypto transaction is considered a taxable event, with different tax rates depending on whether you held the crypto longer than a year or not. In India, there is currently a 30% tax on all income gained from digital assets, with no deductions or exemptions. In Germany, if you hold a crypto asset over a year, the gains are tax-free regardless of the amount of profit. If you sell your crypto assets within 12 months of your purchase date, only profits up to 600 euros are tax free. In Bermuda, crypto isn’t taxed at all. Whether you are a business or individual in Bermuda, there are no crypto taxes on income, capital gains, or other transactions. You can even pay your taxes in crypto.
While this article wouldn’t be able to cover the changing tax regulations of every country, it will help you understand crypto taxes so you can be prepared to follow the requirements of your country’s tax authorities.
The History of Taxes and Crypto
When bitcoin was released in 2009, it seemingly offered a way for people to transfer or store money anonymously. Tax authorities around the world immediately noticed a surge in money laundering and tax evasion using crypto. Over time, due to the nature of the public blockchain and upgrades in tax authorities’ ability to track transactions and link them with individuals, crypto transactions are now known to be pseudonymous. Over the years, many countries and political unions have developed new tax regimes for crypto. Due to the potential benefits of blockchain and DeFi, many governments don’t want to pass strict regulation that hinders innovation or causes their country to lose crypto-related capital and developers to more “crypto-friendly” countries. However, tax authorities still want to collect taxes on this new global asset class.
Understanding crypto taxes
To properly report crypto taxes, there are some key terms you should understand. The terms below will help you in identifying taxable events and calculating taxable income.
- Cryptocurrency name and ticker symbol — If you are using a crypto tax software, this will typically be needed so that you or your crypto software can compute the market price on days transactions happened. The market prices at transactions are very important as they are used to compute taxable income.
- Cost basis — This is the market price you bought the crypto.
- Date of acquisition — Date you acquired the crypto.
- Date of sale or trade — Dates you sold your crypto for crypto or crypto for fiat money.
Types of taxable events
With traditional investments like stocks or bonds, you have two sources of return: capital appreciation and dividends/coupon payments. Capital appreciation is the gain in the price of the asset. Dividends are earnings paid to shareholders and coupon payments are interest paid to bondholders. For crypto, there are many different types of income, gains, or transactions you should be aware of.
- Capital appreciation — The gain in the price of an asset. If you buy one token of XYZ at $100 and the price of the token increases to $170 by the time you sell the token, the $70 increase in price is a taxable gain.
- Realized gain — The gain you make when you sell your crypto for fiat or another crypto at a higher price than your cost basis. If you hold a crypto and don’t convert it to another crypto or to fiat, then the gain is unrealized, and is usually not considered taxable.
- Staking rewards— Staking rewards are normally gained from delegating or depositing your crypto into a proof-of-stake protocol that secures the blockchain. In exchange for helping secure the protocol, you receive rewards in that blockchain’s native coin, such as ADA or ETH. Some blockchains that allow you to stake your assets for rewards are Cardano and Ethereum. For tax purposes, some countries classify staking rewards as income.
- Mining rewards — Rewards earned from being a miner on a proof-of-work protocol like Bitcoin. Some countries classify mining rewards as income for tax purposes.
- Liquidity provider fees — If you become a liquidity provider for a DEX like the Genius DEX or decide to provide liquidity for lending to the MELD platform, you are rewarded in trade fees and interest payments, respectively. Many countries consider these fees and interest payments as income for tax purposes.
- Crypto-to-crypto transactions — While it is common for crypto to fiat transactions to be taxable because of the similarity of selling your stock for fiat, DEXs and CEXs allow you to trade crypto for crypto. You can exchange your ADA for ETH without ever using fiat. Some countries want you to compare the market value of ADA/USD on the sale date to the cost basis of ADA/USD when you purchased the crypto to calculate your capital gain tax liability. Even though you exchanged ADA for ETH, if ADA was trading at a higher market value in fiat than your cost basis, the gain would be taxable.
- Using crypto profits to pay for goods — Let’s say you bought one Bitcoin at $30,000. Later Bitcoin’s price appreciates to $40,000 and you use the bitcoin to purchase a $40,000 car. The $10,000 in capital gain could still be taxable.
How to keep up with your taxes
There are multiple ways to keep up with your crypto taxes. If you are only using a CEX like Coinbase, Kraken, or Robinhood, the exchanges usually have reports or data to help you calculate taxes. If you are sending your crypto to personal wallets and staking it to a PoS platform like Cardano or being a LP on a DEX, calculating taxes will be more complicated. There is an array of crypto tax software that can help you import transactions from multiple wallets for tax purposes. Some include CoinLedger, TokenTax, Koinly, and TaxBit. Take care to observe all applicable laws of your country and do your own research on how to properly file and pay taxes.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.