Over the years, Bitcoin and cryptocurrencies have indicated how much we are hinged to government-controlled currencies (fiat) and gave us a way out. However, most federal governments, after failing to control the space, are positioning themselves to have a piece of the pie through taxing Bitcoins and other cryptocurrencies.
In this post, we look at how different countries are treating tax on cryptocurrencies and how to minimize how much you pay as the tax on virtual currency holdings.
Is cryptocurrency legal? How is tax determined?
Depending on the country, cryptocurrencies can either be legal or illegal. Still, in other countries, certain aspects of cryptocurrencies can be unlawful, while others are legal. As such, cryptocurrency taxation varies in every jurisdiction.
In China, for example, government-controlled financial institutions are not allowed to conduct crypto transactions, but individual holdings of virtual currencies are legal. Also, cryptocurrency mining in the country is legal.
In the United States, cryptocurrency mining, trading, and holding are legal. However, virtual currencies are classified as assets, and crypto trades attract capital gains/losses.
In Japan, Bitcoin and its friends are legal tenders, in Germany, they are a unit of account, while in Switzerland, they are classified under foreign currencies.
How different countries treat crypto tax
In Australia, transacting in cryptocurrencies attracts a capital gains tax (CGT). Actions that attract a CGT include when a trader sells cryptocurrency, trades one cryptocurrency for another (e.g., Bitcoin (BTC) for Ethereum (ETH)), cashes out cryptocurrency for a government-issued currency like the Euro or the USD, or pays for goods and services using virtual currencies.
According to its official website:
Note that if a trader holds different types of cryptocurrencies, each is treated as a separate asset requiring tax to be declared individually.
#2 United Kingdom
In the UK, cryptocurrency trading can attract either a profit tax or a capital gains tax depending on what the country’s tax watchdog, Her Majesty’s Revenue and Customs, considers to bet financial trading.
If it falls under profit tax, a crypto trader can pay between 0-40 percent of the total profits in tax. However, if it falls under capital gains, it can attract a fee of between 10-28 percent of the total taxable amount.
#3 Canada and the USA
Canada has a unique scheme to tax cryptocurrencies. Here, a crypto trader is only required to report half of his gains. For instance, if a trader buys Bitcoin worth $2,000 then sells them at $10,000, they are only obligated to report half of the profits, which would be $4,000 ($10,000-$2,000 = $8,000/2=$4,000).
In the United States, the country’s tax authority, IRS (Internal Revenue Service), taxes cryptocurrencies as property. However, the IRS’s view of airdrops is somehow controversial. As per the tax watchdog, a trader is obligated to pay tax on coins gotten from a hard fork or an airdrop.
However, other financial and law enforcement bodies in the US have a differing view of what cryptocurrencies are.
For example, the Federal Bureau of Investigations (FBI) and the United States Treasury Department Financial Crimes Commission consider Bitcoin to be a virtual currency. FinCEN considers cryptocurrencies to be foreign currencies as it equates exchanging Bitcoin for fiat as the same as exchanging euros for dollars.
In Texas, a judge equated Bitcoin to money because it was used to pay for goods and services.
#4 India, Hong Kong, China, and Russia
After a lengthy court between the Reserve Bank of India and crypto companies in the country, India made some interesting changes to laws governing cryptocurrencies.
Some of the changes include how, in one case, cryptocurrency transactions are a software delivery while in the other, they are under goods and services. Notably, crypto transactions constitute a software delivery if they happen inside the Indian territory. At the same time, they are goods and services if one of the parties in the transaction is located outside India.
Software delivery is tax-free, while goods and services attract a goods and services tax.
Hong Kong crypto traders only pay taxes when the country’s Inland Revenue Department sees fit and not by obligation. However, depending on the frequency of transactions and their source, they can be classified as either income tax or profit tax when conducted by individuals and companies, respectively.
In China, government-owned financial corporations are prohibited from engaging in Bitcoin transactions. Although the Chinese government considers Bitcoin to be a commodity, individuals can hold BTC with no tax obligations.
Russia is still developing a framework around virtual currencies. In 2017, the country’s Ministry of Finance held that cryptocurrencies should be put under financial assets. However, the Russian central bank is adamant about recognizing cryptocurrencies as private currencies. In Russia virtual currencies are put under private digital money.
#5 New Zealand and Germany
In New Zealand, cryptocurrencies are categorized as property thus attracting a 15 percent tax on transactions.
Germany, on the other hand, considers cryptocurrencies to be private property. As such, crypto transactions will only need to be taxed if they total more than 600 euros. Interestingly, Germany rewards patience as it does not tax transactions on cryptocurrencies held for more than 12 months. However, if you trade cryptocurrencies after less than one year of acquisition, the regulator will want part of the proceeds.
Countries that recognize Bitcoin but don’t require cryptocurrency tax
While the IRS and other regulatory bodies worldwide are busy taxing cryptocurrencies, regulators in other countries are giving cryptocurrency traders a holiday. Among the reasons for not taxing cryptocurrencies is to attract investments.
#1 Malaysia and Singapore
In this Southeast Asian country, crypto transactions are not taxed because BTC is yet to become a legal tender in the country.
In Singapore, cryptocurrency holders aren’t taxed. But, if businesses concentrate solely on cryptocurrencies, they are obligated to file income tax
This European country exempts tax on crypto holdings and trading by individuals.
Unfortunately, self-employment activities involving cryptocurrencies such as mining attracts an income tax. Also, professionals profiting from digital currency trading are obligated to report and forfeit income tax.
#3 Slovenia, Belarus, and Malta
In Slovenia, personal crypto transactions don’t constitute capital gains. However, regardless of the currency being traded or exchanged, individuals must pay their income tax.
Businesses conducting mining activities or accept crypto in exchange for goods and services are liable for the corporate tax that can be up to 19 percent.
Belarusian laws regarding Bitcoin taxes are crystal clear. Here, no tax is levied for interacting with cryptocurrencies in any way. After Belarus legalized cryptocurrency in early 2018, buying, selling, and mining cryptocurrencies were exempted from tax because they are personal investments.
In Malta, daily crypto trades are viewed as a business income and attract a 35 percent tax. However, holding virtual currencies for over one year makes the trades tax-free. In Malta, BTC is recognized both as a store of value and a medium of exchange. It’s also considered a unit of account.
Portugal’s tax laws concerning cryptocurrencies are clear. No tax on cryptocurrency activities.
For the Portugal Tax Authority, exchanging Bitcoin or any other digital currency for fiat “constitutes an on-demand, VAT-free exercise of services.”
However, businesses are obligated to pay income or value-added tax if they accept cryptocurrencies in exchange for goods and services.
Popular cryptocurrency tax software
If you aren’t a resident of one of the crypto tax havens, here are tax software you can use to report your Bitcoin taxes:
This software has a user interface that’s easy to use even for a new cryptocurrency trader. It allows crypto traders to import trading data from exchange to tabulate what they owe the taxman accurately.
Its professional nature requires it to use internationally acceptable cost basis techniques such as First-In-First-Out (FIFO).
The TokenTax software for cryptocurrencies is currently the most comprehensive in the market. It’s compatible with top crypto exchanges such as Binance and Coinbase. Notably, if your exchange doesn’t support data importation, the tax software supports a CSV data file from the exchange.
To ease on filing and reporting, TokenTax makes the forms ready after it has acquired all the necessary data from the exchange.
TurboTax has been supporting filing of tax on traditional assets. It then incorporated crypto the same capabilities for cryptocurrency traders. The platform has great options such as “self-employed” and “premier ” that make it easier to use the tool. With the platform, traders get the option to access it online or to download it on their desktops. Note that TurboTax is compatible with CryptoTrader.tax.
This tax software has a clean user interface and is easy to use. It supports over 25 leading exchanges with an option to include expenses incurred. In addition, data from unsupported exchanges can always be loaded to the software using a CSV file.
To make the process of filing tax stress-free and error-free, BearTax matches deposits and withdrawals across exchanges.
Crypto tax calculators
However, if you just want to calculate how much you owe regulators such as the IRS, here are some reliable crypto tax calculators.
Koinly functions by allowing you to import data from your exchange or wallets. The calculator uses the data to generate reports which can be exported to a tax software for filing. Reports produced by Koinly included, but not limited to, margin trades and capital gains.
Zenledger supports major crypto exchanges and can fetch data from anywhere you’ve stored your virtual wealth. Its reports include audit reports, tax forms, among others.
In January 2020, Cointracker offered free usage to users with a maximum of 200 transactions in a tax year. Features available on the free version include error reconciliation and tax calculation on capital gain or loss.
Ways to minimize your virtual currency taxes
If you are not planning to move to a tax haven, you’ll want to watch how much of your profits you share with the government. This can be done by following these rules:
#1 Consider a recognized cost basis
Cost basis can be defined as the initial price of a cryptocurrency. It’s used to calculate whether a gain or loss was made during a trade.
Tax experts and authorities around the world recognize different cost basis methods.
For example, in the United States, the IRS uses FIFO and Specific Identification (Specific ID) to calculate your profits and losses. With FIFO, the IRS considers that the first asset you bought will be the first asset you sell or dispose.
For Specific Identification, however, IRS allows crypto holders to choose which assets they want to sell.
Other cost basis methods include Last-in-First-Out (LIFO), Lower Cost, and Highest Cost.
LIFO allows crypto investors first to dispose of the coins they last bought. Lower Cost and Highest Cost allow traders to dispose of cryptos that have the lowest and highest original prices, respectively.
Depending on which is acceptable by regulators in your jurisdiction, you can significantly lower the amount of taxes you owe.
#2 Be patient
Some countries like Germany don’t charge any cryptocurrency tax for crypto sold after holding for more than 12 months. Holding for longer exempts you from capital gain taxes emanating holding your coins for longer than one year.
#3 Think of an Opportunity Zone fund
In the US, the IRS recognizes Opportunity Zones and encourages investors by providing a unique tax plan known as “preferential tax treatment.” This fund allows investors, including crypto traders, to put part of the capital gains realized after disposing an asset into the fund.
#4 Employ a tax software
It’s very hard or even impossible to trace all crypto transactions in a tax year manually. Even if you try, you’ll end up paying more or fewer taxes. A tax software accurately compiles the transaction data providing you with an optimized tax bill.
How to report cryptocurrency tax
To report cryptocurrency on taxes is similar to reporting gains and losses on other investments such as property and stocks. Here’s the outline:
Keep track of your crypto activities. Whether it’s disposing or trading, you need to keep track and calculate profit or loss.
Employ the IRS tax return form (8949). This cryptocurrency tax form is used to inform the taxman of any trading of cryptocurrency and other capital assets. The form requires a description of the asset sold, date of original acquisition, data of disposal, proceeds, cost basis, and profit or loss.
Transfer totals from 8949 to Schedule D. Schedule D is an IRS form that contains gains and losses from your investment spectrum.
Differentiate between capital and income gains. Income profits are crypto activities such as staking and mining. You also have to specify if it’s a self-employment income and personal income.
Complete the process by attaching reports. Reports can be from cryptocurrency tax software.
Frequently asked questions (FAQs)
Is Bitcoin taxable?
Yes. However, it’s on a country-to-country basis. For example, if you hold BTC for more than a year in Germany, you’re not taxed. Also, Portugal doesn’t tax Bitcoin trades. The IRS in the US, however, taxes Bitcoin as a property.
How are Bitcoins taxed?
In the US, Bitcoin tax is due if you accept Bitcoin as payment, mine Bitcoin, receive it from a hard fork, converting BTC for cash, exchanging BTC with another crypto, or from an airdrop. How Bitcoins are taxed depends on the cost basis method used.
Does Coinbase report to IRS?
Yes. Although not for every Coinbase customer, the exchange may have provided information to the IRS regarding your trading activity. Information likely shared with IRS includes name, tax-ID, address, birth date, transaction log, periodic statements, among others.
Crypto taxes are similar to any type of taxes. However, their definition and calculation differ from one country to another. In some countries, as we have seen, Bitcoins taxes are a headache when filing the tax return form. In other countries, cryptocurrencies aren’t taxed.
The IRS has indicated no chances of exempting crypto traders from paying taxes on their bitcoin holdings. With the IRS tax return form having a general question on crypto ownership, the US may be able to get notable traction on crypto taxation.
Luckily, for traders in countries bent on a tax return for virtual currency traders, software and calculators are available to make the process less tedious.