Most of us do believe that cryptocurrency investors avoid paying taxes. However, this isn’t true when we consider the tax mechanism of various developed countries. Crypto tax is a reality that can’t be ignored. In the US for instance, crypto exchanges are bound to report user activity regarding the gains and losses. The information is then passed to the Internal Revenue Service (IRS) for further analysis.
For tax calculation, cryptocurrency is referred to as a ‘Property.’ Hence, IRS considers and treats cryptocurrencies as capital assets. This suggests that the crypto taxes that you need to pay are similar to what you owe to pay when reporting a capital gain.
If you wonder how taxes work with cryptocurrency, we have gathered the most authentic and reliable information to answer such a question. So without any further ado, let’s dive into the main section of this article.
Calculating Taxes While Trading Cryptocurrency
While buying and selling cryptocurrency, it is essential to calculate the net profit you make. This helps to understand how much tax you owe. However, it isn’t the only way to calculate crypto tax. Besides, you are also required to keep in mind the duration for which you held the cryptocurrency.
The loss or gain may be either long-term or short-term. This particular factor plays a critical role when it comes to knowing how much you have to pay in terms of your crypto taxes. You can offset your capital gains with losses. To do so, it is necessary to offset similar types of losses or gains. For instance, you can offset short-term losses only with short-term gains.
Long-Term Gains or Losses
When a person buys a crypto asset and sells it after holding it for one year, the profit or loss made after this period is referred to as the long-term gain or loss. In terms of a long-term gain, you have to pay less tax. That’s why the tax rates are usually lower on this type of gain. The three current tax rates include 0%, 15%, and 20%.
Short-Term Gains or Losses
When the duration between buying and selling a crypto asset is less than 365 days, the gain on such an investment would be treated as a short-term gain. The tax rates on short-term losses or gains are similar to what you are paying on your income i.e., salaries, wages, commissions, and other remunerations.
How much Crypto Tax do you Owe?
In the US and some other developed countries, you have to pay crypto tax on capital gains. This applies to making a taxable profit or gain by utilizing cryptocurrency in any possible way.
Listed below are the major types of taxable crypto transactions:
- Purchasing the goods/services with cryptocurrency
- Obtaining fiat money by selling cryptocurrency
- Trading between various crypto assets
You are only bound to pay tax in any of the above events if the value of your cryptocurrency has increased. However, things get complicated when you trade between crypto coins. Since crypto trading is taxable, you have to report any gains while filing your tax return.
While trading between cryptocurrencies, it is imperative to keep a record of the amount lost or gained. As a result, you can report your crypto losses or gains accurately and without much of a fuss.
Reporting Crypto Gains or Losses
There is a prescribed form for reporting crypto gains or losses. The taxpayer needs to provide the following details while providing information regarding crypto trades.
- Type of cryptocurrency that you have bought and sold
- Buying date of the crypto asset
- The date when you have sold the crypto asset
- Sale amount of proceeds
- The cost basis of crypto trading
- Capital gain or capital loss
To keep a perfect record of crypto transactions, you must collect the above-mentioned information after every profitable crypto event.
How is Crypto Income Taxed?
The income generated through crypto trading is taxed as ordinary income. The crypto tax is calculated on the market value of the amount gained.
Below are a few of the most common instances of taxable crypto income:
- Earning rewards by mining cryptocurrency
- Providing services and receiving payments in cryptocurrency
- Earning rewards via crypto staking
- Receiving interest by lending cryptocurrency
Whether Crypto is Taxed like Stocks?
Yes, cryptocurrency is taxed just like stocks. When an individual gains a profit by selling a cryptocurrency, you are bound to pay tax on the amount gained. In addition, the crypto tax rates are similar to tax rates on stocks. While investing in cryptocurrency, you have to report your gains and losses to calculate and pay your crypto tax accurately.
Ways to Lower Crypto Tax
As in the case of other investments, people investing in crypto assets also want to keep the tax burden to its minimum. Here are some of the effective ways to lower your crypto taxes.
- You should try holding your crypto asset for over a year. In terms of long-term gains, you can seek the advantage of lower tax rates.
- You can also think about using tax-loss harvesting or offsetting your crypto tax. For instance, you can use the capital loss on one type of cryptocurrency to offset your gains on any other type of cryptocurrency.
- Opening a crypto IRA (Individual Retirement Account) is another way to minimize the crypto tax. This account works similarly to other types of IRA accounts. It allows you to make tax-deductible contributions.
Countries that are Considered Tax Haven
The framework of crypto taxation isn’t universal at all, as its approach varies from country to country. There are certain countries without a comprehensive framework, which is required to clearly define the guidelines associated with the crypto tax.
A wide range of countries is levying crypto tax on capital gains associated with cryptocurrency transactions. However, there are still numerous destinations that are considered tax havens.
These countries are aiming at a unique approach while adopting cryptocurrency. Hence, they try to implement friendlier legislation. This allows investors to make crypto investments without any tax liability.
Listed below are the most common crypto-friendly countries with limited or no crypto tax.
Germany has its own take on taxing capital gain on cryptocurrencies. Unlike various other states, it considers crypto assets as private money. The residents of Germany are exempted from any kind of tax if they hold their crypto assets for more than a year. Besides, there is no limit to the invested amount.
On the contrary, a capital gain exceeding 600 euros is taxed in Germany if such a particular crypto asset was held for less than one year. Any capital gain below such an amount isn’t taxable.
Besides, startups or businesses are bound to pay ‘Corporate Income Tax’ on capital gains linked with crypto investments.
Bermuda is a true tax haven, as it doesn’t tax capital gains on cryptocurrencies. This country doesn’t impose any kind of tax on income or gain generated through investments in cryptocurrency. Besides, the transactions involving crypto assets are also tax-free.
Bermuda has gone a step further in promoting digital assets. The government is accepting payments for different fees and taxes in USD Coin (USDC). Hence, this country is making every possible move to promote cryptocurrency.
Malta is another popular tax haven for crypto investors. In fact, this country is known as a “Blockchain Island”. Malta recognizes cryptocurrencies like Bitcoin as a valuable asset and a medium of exchange.
The country doesn’t implement a tax on crypto-related capital gains if such an investment is held for a longer period. Crypto investments are similar to investing in shares, which are taxable at a rate of 35%. Nevertheless, such a tax can be mitigated between 5% to zero by availing of “Structuring Options”.
Malta has also published fiscal guidelines in 2018, which help to discriminate between cryptocurrency and ‘Financial Tokens’.Such tokens are treated as interests, dividends, or premiums. Hence, gains through such means are taxed at a specific rate.
The crypto-related tax legislation in this country is somewhat complicated. Even with the introduction of the new guideline in 2020, things are quite hard to understand for the taxpayers. In Hong Kong, cryptocurrencies are taxed in terms of their use.
The crypto assets held for a longer period aren’t taxed under the capital gains tax. Yet, this rule doesn’t apply to corporations. For businesses operating in this country, the profit or capital gain obtained via the sale of a crypt asset is taxable.
Slovenia is considered a tax haven for crypto investors. It has created a separate crypto tax regime for individuals and businesses. When individuals sell crypto assets, it isn’t treated as an income. Hence, such gain isn’t taxable.
The companies or businesses that deal in cryptocurrencies or receive payments in crypto are taxed at a specific corporate rate. Besides, token distribution is subject to tax at certain rates that can reach up to 50%.
The crypto communities operating in Slovenia are working with the tax authorities and regulators to bring some clarity to the crypto tax laws.
As far as Belarus is concerned, this country is taking an experimental approach regarding crypto assets. Under a new law implemented in 2018, cryptocurrency activities or transactions are exempted from taxes until 2023. This rule applies to both businesses and individuals.
According to this law, investing and crypto mining are considered personal investments. Hence, such activities are free from income tax as well as capital gains tax.
The purpose of introducing liberal laws is to create a strong and sustainable digital economy. Belarus is a true tax haven, as it was ranked third in Eastern Europe in terms of P2P crypto trading.
In Malaysia, crypto transactions don’t fall under the ambit of capital gains tax. That’s why cryptocurrencies aren’t considered legal tender or assets by the tax authorities. Hence, all types of crypto transactions are tax-free in Malaysia.
On the other hand, profits from active or regular cryptocurrency trading may be treated as a revenue stream. Hence, gains from such a source are taxed.
To put it simply, the capital gain associated with unplanned or passive trading of a crypto asset is tax-free. However, the income generated through the repeated and systematic trading of cryptocurrency is taxable.
Switzerland is a popular tax haven for crypto investors. This landlocked country has flexible and less stringent tax regulations. For instance, wealthy individuals have to pay low taxes (levies taxes only on households).
The tax authorities also treat crypto trading in a similar way, as it does with other transactions. The profits generated through crypto trading are exempted from tax reporting. Nevertheless, crypto companies are taxed on the profits they make through crypto trading.
Due to a favorable crypto tax environment, numerous crypto foundations and companies have selected Switzerland to be their business destination.
This is another attractive spot for crypto investors and startups. The crypto tax laws are relaxed, especially when it comes to capital gains. In the Cayman Islands, all types of crypto activities and transactions are tax-free.
Most importantly, the government and financial regulators of the Cayman Islands are trying to attract crypto investors by offering a tax-friendly business atmosphere. Hence, this country has contributed to the growth of crypto communities by introducing flexible regulations.
With the development and growth of the crypto world, various countries are now planning to regulate crypto transactions. Especially, this is done by imposing taxes on gains associated with cryptocurrency investments.
Despite the imposition of crypto tax by different countries, you can still locate a tax haven with limited or no crypto tax regulations. The motivation behind such behavior varies depending on the tax structure and financial circumstances of each country.
In most cases, it is done to attract crypto investors. Numerous countries are now establishing favorable tax regulations for this purpose. As a result, these countries can strengthen their economies through the introduction of crypto-friendly tax laws.