Key Insights
- Cryptocurrency tax laws are an important part of crypto investment to keep in mind.
- Jurisdictions around the world typically require taxes for crypto income and purchases.
- The IRS in the US is a considerable yardstick for how crypto taxes are calculated around the world.
- In many parts of the world, crypto is considered in the same light as other assets like stocks and real estate.
Crypto has become more than a mere niche of investment.
As the years go by, more and more investors around the world continue to add digital assets to their portfolios.
This is because of the asset class’ ability to bring in massive gains in short periods, compared to the stock, gold, or index market.
However, as this popularity grows, so does the scrutiny from the tax authorities.
If you trade, spend, or earn in crypto, it is important to understand whether or not you owe taxes and which countries demand these obligations.
Here’s what to know about crypto tax, cryptocurrency tax laws, penalties, and tax requirements when it comes to crypto.
How the IRS Views Crypto?
Starting with the IRS in the United States, the Internal Revenue Service views crypto as property and not currency.
This means that every time a person sells, exchanges, or uses crypto, this can trigger a taxable event.
This is a lot unlike regular fiat, which doesn’t often trigger taxes for transactions.
Crypto is viewed a lot like stocks in many parts of the world, where users owe tax on any gains.
Remember that tax agencies differ in countries across the world. However, the IRS’ tax rates are a good yardstick for a general overview of how crypto tax is calculated.
When Do You Owe Taxes on Crypto?
So when do you owe taxes on crypto? In many parts of the world, users can owe taxes in certain scenarios—like selling crypto for fiat (like USD, EUR, and so on).
This means that if you sell Bitcoin, Ethereum, Solana, or any other kind of digital asset for profit, you owe capital gains crypto tax.
Another scenario occurs when you trade one crypto for another.
Exchanging Bitcoin for Ethereum or Solana for Cardano is a taxable event because it involves disposing of one piece of property for another.
One more scenario occurs when users spend crypto on goods and services.
Many companies and businesses accept payment in Bitcoin, Ethereum, Solana, and even Dogecoin.
If you buy a cup of coffee or a laptop, for example, and its value has increased since you acquired it, you owe tax on the price gains.
Earning crypto as income is also a taxable event.
Many professionals receive crypto as payment for work, mining, staking, or even airdrops. These events are taxed as ordinary income, based on market value at the time of the transaction.
Finally, receiving new tokens from a hard fork can incur taxes. If a blockchain splits and you receive new tokens (like Bitcoin Cash from Bitcoin or Ethereum Classic from Ethereum), the IRS considers this taxable income.
What Isn’t Taxed?
While the tax net is wide for crypto, certain events are exempted from cryptocurrency tax laws.
One of these is buying crypto with fiat. While exchanging crypto for fiat is taxable, the reverse is exempt from this rule.
This means that simply purchasing Ethereum, for example, with USD is not taxable.
Furthermore, transferring crypto between wallets owned by the same individual is also not taxable
Donating crypto to charity is not taxable as well and can even help users qualify for a tax reduction.
In addition, gifting crypto (within legal limits) warrants no taxes, as long as the gift doesn’t exceed the annual tax fee threshold.
Understanding Capital Gains Taxes on Crypto
Crypto, like stocks and real estate, is subject to capital tax gains.
This means that the amount a person owes depends on how long an asset is held before selling.
Short-term capital gains (crypto held for less than a year) are typically taxed at the ordinary income tax rate (between 0% to 37%).
On the flip side, long-term capital gains (crypto held for more than a year) have lower rates of between 0% to 20%, depending on taxable income.
For example, if you bought Bitcoin at around $40,000 and sold it six months later for $50,000, you owe taxes on the $10,000 profit at the ordinary income tax rate.
On the flip side, if you had held for longer than a year, you owe a lower income tax based on the lower rate for assets held for longer.
Examples of Taxable Crypto Transactions
Buying a Car with Bitcoin
Assuming you buy 1 BTC at $10,000 in 2019 and then used it to purchase a car in 2024 when its price has risen to $100,000:
- You must first report the $90,000 capital gain on your taxes and pay tax for it.
- You must also pay any applicable sales tax on the car purchase.
- The seller must report the Bitcoin market value as income and pay capital gains tax (if they later choose to sell it for fiat)
Using Mined Crypto to Make Purchases
If you mined Bitcoin, for example, and later used it to buy something, you might owe taxes.
This is because:
Bitcoin earned from mining is taxable, based on its value at the time of the purchase.
If the mined Bitcoin increases in value before being spent, you owe income tax.
You must also pay taxes on the purchased goods (like the car in the previous example)
Crypto Mining and Staking Taxes
Mining crypto is taxable as well because it is considered income. If you conduct mining as a business, you can deduct expenses for electricity and hardware.
However, taxes are required at the end of the day for the fair market value of the gained crypto.
Similarly, crypto gained from staking is also taxed as income. If you sell or use these rewards, any gains you make are subject to cryptocurrency tax laws.
Cryptocurrency Tax Laws Around the World
The IRS’ tax laws are similar to tax laws in the rest of the world. However, here are a few jurisdictions and their specific tax requirements:
Canada
In Canada, buying crypto is tax-free, when done with CAD. This applies to the holding and transferring the asset class.
However, Federal income tax on crypto can reach 33%, plus state income tax.
Australia
Buying crypto with AUD, holding it, or transferring it is tax-free. However, crypto donations and gifting may be liable for taxes.
Users are also required to pay a slightly higher fee of 45% crypto tax on short-term gains.
Income from Long-term crypto holdings also comes in at a 50% Capital Gains Tax discount.
United Kingdom
Selling, swapping, spending, or gifting crypto is subject to taxes in the UK.
This applies to earning crypto through mining and staking as well, with 10% – 20% capital gains requirements depending on your income tax band.
It is worth mentioning that gifting crypto to a spouse is tax-free.
Overall, citizens are required to pay 40% of income from crypto, along with a £3,000 tax-free allowance for capital gains that began in 2024 onward.
Germany
Crypto income and short-term gains are taxable in Germany, while gains over the long run are tax-free.
In addition, gains of up to €600 annually or extra income of up to €256 annually are exempt from reporting requirements.
Citizens can purchase, retain, or transfer crypto via EUR on a tax-free basis, with crypto losses being carried forward and adjusted against gains.
Ireland
Selling, spending, or trading crypto is subject to Capital Gains tax in Ireland.
Citizens pay a 33% crypto tax on capital gains, along with a tax-free exemption of €1,270.
Finally, gifting crypto in Ireland is subject to tax requirements of 33%.
Overall, cryptocurrency tax laws around the world are incredibly similar, but with a few changes and exceptions here and there.
Understanding how taxes are calculated in world jurisdictions is one of the requirements for becoming a profitable crypto investor.
