Introduction to Cryptocurrency Taxation
Cryptocurrency trading is subject to some form of taxation, in most countries. These tax regulations vary by country, and it is important to research your country’s tax laws in order to understand the specifics. A compilation of more detailed information about country-specific cryptocurrency tax laws can be found below.
This article will briefly explain the fundamentals of cryptocurrency taxation, and discuss the basic trading and storage mechanisms for cryptocurrencies. This article should not be considered legal advice — always speak with a tax professional if you are unsure about how to proceed with calculating and reporting your capital gains taxes.
You can often find more information about the specifics of your country’s taxation rulings on official government websites (such as IRS.gov for United States taxation information). A compilation of information on crypto tax regulations in the United States, Canada, The United Kingdom, Germany, and Australia, which can be found here.
The Library of Congress published useful information in June 2018 with crytpocurrency taxation information for the following jurisdictions: Argentina, Australia, Belarus, Brazil, Canada, China, France, Gibraltar, Iran, Israel, Japan, Jersey, Mexico, and Switzerland. This document can be found here. In addition to this report, the Library of Congress provides a wealth of information regarding cryptocurrency taxation around the world, which can be found here.
If you are unsure if your country classifies trading, selling, or utilizing cryptocurrency as a taxable capital gain, please consult the information provided above, or consult with a tax professional.
Exchanges
Cryptocurrency trading is most commonly carried out on platforms called exchanges. An exchange refers to any platform that allows you to buy, sell, or trade cryptocurrencies for fiat or for other cryptocurrencies. There are a large number of exchanges which vary in utility — there are brokers, where you can use fiat to purchase cryptocurrency at a set price and there are trading platforms, where buyers and sellers can exchange crypto with one another. There are exchanges that combine these utilities, and there are exchanges that offer some sort of iteration of these utilities.
The term “fiat” is used throughout this article. For those reading who are unfamiliar, the term “fiat” refers to a country’s legal tender, such as USD or CAD.
One example of a popular exchange is Coinbase. On Coinbase, you can spend fiat to purchase Bitcoin, Bitcoin Cash, Litecoin, Ethereum, and Ethereum Classic. Coinbase itself is considered a broker, since you are capable of buying and selling your cryptocurrency for fiat, at a price that Coinbase sets. Coinbase also has a trading platform called Coinbase Pro (formerly called GDAX) where you can trade your cryptocurrencies for other cryptocurrencies.
Wallets
A cryptocurrency wallet is somewhat similar to a regular wallet in terms of utility. A cryptocurrency wallet does not actually store crypto, but rather stores your crypto encryption keys, communicates with the blockchain, and allows you to monitor, send, and receive your crypto.
Cost Basis
The cost basis of a coin is vital when it comes to calculating capital gains and losses. The cost basis of a coin refers to its original value.
Example: You buy 1 BTC for $6,500. The cost basis for that 1 BTC would then be what you paid, $6,500.
Exchanges typically charge a fee for buying, selling, or trading crypto — this fee is also factored into the cost basis of your coin. Consider the above example — if you paid $6,500 for 1 BTC and you were charged a $100 fee, your cost basis would be $6,600.
Capital Gains & Capital Gains Tax
The United States, and many other countries, classify Bitcoin and other cryptocurrencies as capital assets — this means that any gains made are treated like capital gains.
A capital gain, in simple terms, is a profit realized. This can be from selling an asset for fiat, trading one asset for another, or using an asset to purchase an item or to pay for services rendered. Please refer to the “Taxable Events” section for a more in-depth look at the types of events that can incur capital gains.
A capital gains tax refers to the tax you owe on your realized gains. If you profit off utilizing your coins (i.e., trading, selling, etc.), those profits are taxed. Any losses you incur are weighed against your capital gains, which will reduce the amount of taxes owed.
So anytime a taxable event occurs and a capital gain is realized, you owe a capital gains tax on the fiat value of the gain.
Example: You buy 1 BTC for $6,000 USD and then later sell that 1 BTC for $10,000. You’ve made a profit, or capital gain, of $4,000. If your country is one of the many that taxes capital gains, you will have to pay a capital gains tax on the $4,000 capital gain.
Tax Rates: Short & Long-Term Gains
The rates at which you pay capital gain taxes depend your country’s tax laws. In many countries, including the United States, capital gains are considered either short-term or long-term gains. The distinction between the two is simple to understand: long-term gains are gains that are realized on assets that are held for more than 1 year. Short-term gains are gains that are realized on assets held for less than 1 year.
Long-term gains are typically taxed at a (significantly) lower rate than short-term gains. These rates depend on your country’s tax laws.
Taxable Events
A taxable event refers to any type of cryptocurrency transaction that results in a capital gain (or profit). Here are the ways in which your cryptocurrency use could result in a capital gain:
- Buying Crypto with Crypto
- Selling Crypto for Fiat (i.e., USD or CAD)
- Buying items or paying for services rendered with Crypto
The taxation of cryptocurrency contains many nuances — there are variations of the aforementioned events that could also result in a taxable event occurring (i.e., trading with coins acquired from a fork/split or buying something with crypto that you received for services rendered).
Buying a cryptocurrency with fiat is not, in itself, a taxable event. A taxable event occurs once the crypto is utilized.
Reporting Your Capital Gains
As cryptocurrency trading becomes more commonplace, tax authorities are clarifying regulations and cracking down on enforcement. Some exchanges, like Coinbase, are have already been ordered by the government to turn over trading data for specific customers.
It’s important that you are keeping records of, and reporting, any occurrence of a taxable event, even if the taxable event resulted in a loss.
Since most countries treat profits from cryptocurrency trading as capital gains income, you should ensure you are following your local tax reporting requirements. Please speak with your own tax professional or accountant for correct information and tax advice. To help calculate your own capital gains or losses from trading and other cryptocurrency activity you can sign up for a free account at BitcoinTaxes.
Bitcoin.Tax is the leading capital gains and income calculator for Bitcoin and other cryptocurrencies. Simply import your trading, spending and mining information from various exchanges and wallets to create an up to date record of your activity, view your tax liability, and export information to include in your tax returns.
