Paying taxes on cryptocurrencies has been somewhat of a gray area in the past few years. With such a sudden and dramatic rise in cryptocurrency popularity, the knowledge of the taxes you must pay on any gains has maybe not quite caught up with the general hype of cryptocurrencies. However, you absolutely do need to pay taxes for some of your crypto-based financial activities and of course, you can get into some considerable trouble if you don’t.
It’s also good to remember that blockchain technology records all transactions made within its system, and any exchange or broker you use like Binance or eToro will also have a record of your financial activities.
But not everything you do with your crypto needs to be taxed. That's why we've created this quick and easy-to-follow guide to detail everything you may need to know about paying taxes on cryptocurrency. From what constitutes a taxable transaction, to what doesn’t, and some regional-specific advice.
Cryptocurrency Tax Classifications
The first important thing to understand is how cryptocurrencies are classified in a taxable context. Cryptocurrencies are currently defined as digital property, meaning they will be taxed according to the gains and losses that they make. In layman's terms, this means if you use a cryptocurrency asset to buy something else or trade it for something else you are liable to pay capital gains tax on that transaction.
While this means you may have to pay taxes on any gains you make, it also means you may deduct payable taxes from your tax return if you have made any losses. Of course, none of us want to make any losses on cryptocurrency trading, but it is a risky asset and this is a reality for many, so in this case, you could save money on your taxes.
There is also a second classification you need to pay attention to. The amount of time that you have held your asset will also affect the tax rate applied to it. For example, long-held assets will be taxed as long-term capital gains and shorter-held assets as short-term gains. Generally, short-term assets are taxed as ordinary household income but long-term capital gains have their own tax rates.
The activity you undertake will ultimately be the critical factor in determining what rate of tax you pay.
What Do I Need to Declare When Making a Tax Return?
The first thing you need to be clear on when paying tax on cryptocurrency is what activity you are performing with it. You need to be clear on this because this will ultimately determine if you are subject to taxes and what classification of taxes you will pay.
Here we have constructed a list of all the most popular ways of using cryptocurrency and then described what type of tax will apply to you. This is, however, a generalization so be sure to do your own due diligence to ensure you have classified your cryptocurrency activity effectively.
Taxable (Capital Gains)
Cryptocurrency trading is probably the most popular activity among users when talking about the cryptocurrency space. This means if you swap or sell any type of crypto digital asset for another one then you are liable to pay capital gains tax on it.
For example, if you want to trade your Bitcoin to buy some Shiba Inu then you will pay a tax on any gains that your BTC made in the time since you bought it.
If you are holding any cryptocurrency in your wallet/account then at some point you will probably want to sell it. If you ever sell your crypto assets for cash or even again swap them for another cryptocurrency, then you are liable to pay capital gains taxes on those gains.
For example, if I now decide to sell my Bitcoin for USD to transfer it to my bank account, then I have to pay taxes on any gains made.
Buying Goods and Services
Buying goods and services is also a very similar type of transaction to selling and trading cryptocurrency - at least in the eyes of tax institutions. As before, if you buy a good or service with a cryptocurrency that has made some sort of gains since its purchase, then these gains are subject to capital gains taxes.
For example, if I hold Bitcoin that has made some gains in the past year and I use that BTC to buy a holiday, I am liable to pay tax on those gains made.
Trading and Purchasing NFTs
NFTs can be considered the same as cryptocurrencies; they are digital property and therefore whenever you trade or sell one of them you are liable to pay capital gains taxes on it.
Taxable (Ordinary Income)
Providing Goods and Services
If you are paid for providing any type of good or service in crypto then you must report this as ordinary income to be subject to income taxes. In this way, you can think of cryptocurrency income in the same way as any regular type of income.
For example, if you throw an event for an individual and they wish to pay you in crypto then this would be subject to ordinary income taxes.
Salary in Crypto
Similarly, any salary that you earn from your job or profession in cryptocurrency must be reported as general income so it can be subject to ordinary income taxes.
For example, if I work for a crypto bank and I earn 30% of my wages in crypto then this is liable for income taxes.
Mining also would be classified as a type of general income so you must notify your relevant tax body of any income you make.
Any income you make from staking certain coins, or even NTFs, must also be reported as it is subject to general income taxes.
Cryptocurrency Airdrops are also something to be careful with. While they are free you are liable to report them for general income taxes.
The action of buying the cryptocurrency and just HODLing it is not taxable in any form. So it can be beneficial to delay in selling your assets but again remember, as soon as you sell or trade it becomes a taxable asset.
We advise that you check with the specific regulations of your chosen charity, but generally, if you donate cryptocurrency to a charity you are not liable to pay taxes on it; at least you should be able to apply for some sort of reduction.
There is a $15,000 limit on non-taxable gifts that you can send to friends, family, or partners. Anything that exceeds this limit will need to be reported to your relevant tax authority.
What Tax Policy Affects Me?
You must be diligent and aware of what specific tax regulations affect you. We have outlined some very general rules that mostly apply to countries like the USA but different countries will have different rules.
Be sure to first check that cryptocurrency is classified as the digital or non-digital property in your country and then look up the relevant information for those types of assets.
Paying tax on cryptocurrency is one of the most important elements of cryptocurrencies to be informed on. There have been countless stories over the past five years of people not being aware they needed to pay taxes on their gains and getting into trouble both financially and with regulatory bodies.
All gains made on cryptocurrencies must be taxed; a gain is classified as you selling, trading, or buying something with an asset that is worth more than when you bought it. (This is the same for NFTs).
So remember to be aware of what gains you are making on your assets and also what the tax regulations are in your country of operation. Different countries will have different rules so it's important to make sure you are up-to-date and in line with all the information you should be.