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The recent regulatory clampdown on cryptocurrencies underscores more than ever that digital assets are now well and truly under the eye of the authorities. While the financial regulators zone in on large crypto exchanges such as Binance, it may be easy to imagine that everyday crypto users can fly under the radar. However, at this point in the evolution of cryptocurrencies, tax authorities across the globe have the right to take their cut of your crypto gains. Being responsible enough to meet your reporting and payment obligations is down to you.
The issue is that many people, particularly newcomers to crypto, may not even know what kind of digital asset transactions are taxable. If this sounds like you, you may risk falling foul of your responsibilities without being aware.
Cryptocurrency tax laws vary between countries, so before you take any action, you should make sure you check up with your own tax office to verify your individual circumstances.
However, many countries have comparable taxation rules on crypto, so it’s worth knowing the types of crypto-related activities that you’re obliged to report and what may be taxable. The scenarios described here generally apply in countries that treat cryptocurrencies as assets and apply capital gains tax to transactions.
1. Buying, Selling, and Trading Cryptocurrencies
Buying cryptocurrencies with fiat generally doesn’t trigger any tax payment obligations (also known as a “taxable event”). Still, depending on the jurisdiction, it may be a requirement to report your cryptocurrency positions.
Selling crypto for fiat is likely to trigger a reporting obligation, as well as tax levied on the gain or the opportunity to offset a loss.
In the United States and several other countries, a crypto-to-crypto transaction can also trigger a taxable event – something that many cryptocurrency users don’t realize. For this reason, it’s important that you’re able to report on every single crypto transaction, including all gains and losses. You’ll also need to be able to establish a basis – a fiat valuation for
This doesn’t have to be as arduous as it sounds. Services like Crypto Tax Calculator allow you to simply plug in your exchange keys or wallet addresses and will do all the legwork necessary to categorize your transaction history so you can create your tax reports and see an overview of your obligations.
2. Accepting Cryptocurrency as a Salary Payment
If you’re one of the many people opting to make a career in the burgeoning cryptocurrency space, then the chances are you may have accepted Bitcoin or some token or another for payment. This could create a more complex scenario; salaries paid in cryptocurrencies can be treated as ordinary income. However, tax is levied on the value of the cryptocurrency at the time you received it, regardless of whether you hold or sell it.
If you sell later, it will trigger a taxable event, and capital gains or losses will be applied to the difference between the receipt value and the sale value.
3. Using Crypto to Buy Goods and Services
If you think that simply liquidating your BTC by spending it with a merchant is a way around your tax obligations, you’d be wrong. If you use cryptocurrencies to pay for goods and services, then you’re triggering a taxable event with the purchase transaction. Capital gains tax will apply to any gains you made up to the point you made the purchase.
4. Mining and Staking Rewards
Mining and staking rewards are taxable. In general, the cost basis is the market value at the time you received the mining or staking rewards and will be used as the basis of calculating income tax.
When you trade them for other cryptos, for fiat, or goods and services, a taxable event is triggered, and capital gains tax becomes due on any profit.
5. Accepting Crypto as Payment for Goods and Services
Accepting cryptocurrencies for goods and services would generally be classed as income, assuming you’re accepting it on behalf of an individual. Therefore, it would be in the same category as earning crypto and mining crypto, described above.
6. Airdrops and Forks
Airdrops and forks are also taxable events, for which the tokens received are treated as income, taxable at the point of receipt. If the tokens are later sold, then capital gains or losses are applied to the price differential. Effectively, it’s the same rules as earning cryptocurrency.
This list isn’t intended to be exhaustive; instead, equip users with a basic understanding of how tax rules may be applied to different scenarios. The most important thing is not to bury your head in the sand – with tax authorities forcing user data from exchanges, compliance is the only way to avoid the risk of being found out.
So what happens if you’ve already fallen behind? We asked Shane Brunette, CEO of Crypto Tax Calculator, if you’re likely to face penalties if you attempt to offer a retroactive correction. He said:
“Generally speaking, not at this stage. Most tax authorities have been very accommodating if you are proactive. You might need to pay a nominal amount of interest on outstanding balances.”
He also advises people to talk to their accountants, or to check out the guidelines provided by your tax authority. For example, the IRS has provided detailed guidelines on cryptocurrency taxes which are easily accessible.