Updated: Apr 27
Currently, uncertainty generally reigns, as cryptocurrency taxation for regulatory bodies around the world is a work-in-progress. Nonetheless, we must comply with the laws of our respective countries as they exist now as our current cryptocurrency holders, lest we incur tax offences and trigger bigger problems down the line.
To help give you a clearer understanding of the emerging international legislative spectrum, we will break down the taxation models applied to cryptocurrencies in a few of the world's most successful nations.
The Three Main Taxation Forms
Many countries send their crypto users to one of three types of specific taxation:
• Tax on income or Income Tax
• Company tax
• Tax on capital gains or Capital Gain Tax
Income tax: refers to all non-incorporated organizations earning income from Bitcoin or other cryptocurrencies.
Company tax: refers to enterprise-grade activities that are massive and work with vast quantities of crypto accordingly. For instance, consider a cloud-mining firm like Genesis Mining.
Tax on capital gains: refers to traders who have speculatively invested in crypto for the sole intention of making gains. Depending on various requirements, many nations divide capital gains taxes into short-term gains and long-term gain.
Fact about Capital Gains Taxes
For any profits from their crypto holdings, the vast majority of crypto owners and traders in the USA and Canada will have to pay capital gains taxes. Although crypto-tax laws are still in their beginning phases, most nations have established taxation structures for capital gains.
It is much easier to calculate the cost basis of a stock exchange than to deal with the cost basis for cryptos. While cryptos are considered for tax purposes like a commodity, they are quite close to a currency. That implies that the cost basis for both cryptos has to be determined in the currency of taxation when one crypto is exchanged for another.
For instance, if you exchanged BTC for ETH, the price of both currencies will serve as the cost basis for the exchange at the time of trading against the US dollar (for US taxpayers).
Moreover, If BTC=$4,000 and ETH=$140, and you were to purchase one ETH, it would set a cost basis of $140. That number would be essential to record’s if you purchased it for less than you sold it for, the BTC you traded would be taxed. That dollar figure serves as the basis for the capital gains tax that will be imposed if and when you plan to sell the ETH that costs $140.
The condition is simpler when you trade your crypto for fiat (or vice versa). The cost basis would be measured in the same currency in which you pay taxes when you exchange crypto against fiat.
How Are cryptocurrencies Taxed?
There has never been a better time to learn about how the IRS taxes your crypto-currency profits, with bitcoin lingering near its all-time high and the fast-approaching tax season.
1. IRS Treats Cryptocurrency as Property
Cryptocurrencies, according to the IRS Notice 2014-21, are regarded as property. Therefore, if you earn any profit, you have to pay taxes on the following transactions. Subject to certain restrictions and exceptions, losses are exempt from your taxes
2. Selling Cryptocurrency into USD (Cashing Out)
Let’s say you bought 1 bitcoin (BTC) in January 2020 for $4,000 and traded it in December 2020 for $20,000. $16,000 ($20,000 - $4,000) is the benefit from this transaction. Since you only kept the coin for less than 12 months, this $16,000 is called short-term capital gains. As a consequence, the $16,000 will be taxed as ordinary income and subject to the 10-37% income tax bracket.
Alternatively, if you sell the BTC more than 12 months after holding it, the $16,000 gain would be entitled to long-term capital gain that give you more advantageous tax rates (0 percent, 15 percent, or a maximum 20 percent).
3. Buying Cryptocurrency Using Another Cryptocurrency (or a Crypto-to- Crypto Trade)
Let’s assume you purchased 1 BTC priced at $40,000 using 40 ether (ETH). You bought this ETH for $10,000 a few years ago. A profit of $30,000 ($40,000 - $10,000) would be subject to capital gain taxes during this transaction. Here, the reasoning is that your wealth has risen by $30,000 by the time you invest 40 ETH to buy 1 BTC. The IRS taxes the delta here. For tax reasons, receiving cash or not is meaningless (A15).
Notice that it is not a taxable activity to purchase a cryptocurrency utilizing USD.
4. Earning, Mining, or Staking Cryptocurrency
Accruing cryptocurrency by rewards or a source of income equivalent to interest income, mining income, and staking income are taxed at the time of receipt as regular income.
Let’s say that you have gained 1 BTC as interest (or mining or staking income for this matter). This amounts to $10,000 at the time of receipt. Based on your normal income tax bracket, you will be taxed on $10,000 of income, assuming you sold this coin for $18,000 later on. The $8,000 ($18,000 - $10,000) will be taxed here as capital gains.
5. Cryptocurrency Airdrops & Hard Forks
Finally, based on Rev. Rul. of the IRS. 2019-24, cryptocurrency earned by airdrops and hard forks is taxed at the time of receipt as ordinary income. E.g., in 2020, Spark and $UNI airdrop happened. It is very normal to see that after you get the airdrop, the coin value falls back.
Unfortunately, unless you sell the coin to justify the loss, you cannot get any tax-exempt status for this.
Crypto is handled differently by various countries. Cryptocurrency investment identification is also hard if not impossible for government tax collectors. While investments that remain in the digital world may go unheard for a few more months, tax authorities will be alarmed by the increase in value.
Banks receiving large transactions will ask questions and track suspicious activities. It is therefore recommended that each year investors should disclose cryptocurrency revenue and wealth to the authorities honestly.