Some of the people jumping into the crypto market this year and last weren’t just new to crypto. They had little experience trading commodities in the fiat world. As a result, they don’t know how — or even whether — they have to pay taxes on their crypto. (Spoiler: they probably do.) Our Crypto Taxes 101 Guide will help you understand some of crypto’s tax implications.
The only person you can trust for tax advice is a professional, licensed tax advisor. This article will give you the basic information you need to start asking the right questions. But tax law is complicated and crypto’s integration into the economy is still a work in progress. Your idea of what makes sense may not match the taxman’s expectations. Guess who wins? You should sit down with a professional now while you still have a chance to make adjustments to your crypto investment strategy.
Ways Crypto Gets Taxed
Most governments refuse to treat crypto as a “real” currency since it isn’t issued and regulated by a government. Instead, they treat crypto as an asset like gold bars or equities. On the plus side, tax agencies have established policies for asset-based taxes. On the downside, cryptocurrencies aren’t pure assets which creates grey areas in the rules.
Taxes on crypto trading
Profits or losses from trading on crypto exchanges are no different from stock trades. Tax authorities expect crypto traders to include any capital gains or losses in their capital gains tax calculations.
That calculation can be complex. The fiat-equivalent amount you received for selling crypto is an easy calculation. Let’s say you sold a bitcoin on June 7, 2018. All you have to do is find that day’s bitcoin-to-fiat exchange rate on a major crypto exchange.
But what do you use to calculate the fiat-equivalent of the crypto’s original purchase price? A bitcoin you bought in 2016 and sold in mid-2018 would generate a large capital gain. A bitcoin you bought in late 2017 and sold in mid-2018 would generate a large capital loss. In one case, your tax bill goes up. In the other case, your tax bill goes down.
These scenarios happen all the time in the fiat world when buying and selling stocks, bonds and other commodities. Taxation agencies apply the same rules developed for these traditional transactions to crypto transactions. Even then, there is room for interpretation. Interpret things the wrong way, however, and you could face significant fines for tax evasion.
Tools like CoinTracker integrate with the largest crypto exchanges to make the process easier. They pull your transaction history and track when you purchased and sold each coin.
Taxes on crypto purchases
Tax authorities may treat the use of crypto to buy goods or services as a barter deal. A value-added tax (VAT), sales tax or income tax may apply to the fiat-value of the crypto payment. Which tax you pay depends on the nature of the transaction and your role in the transaction.
There’s a catch
There’s another tax implication to crypto-based purchases. With fiat, tax authorities don’t care whether the local currency has gone up or down in value. With crypto, however, you may be on the hook for capital gains taxes in addition to the sales tax or VAT.
Let’s say you bought 100 bitcoin in 2014 when it traded at $500. You decide to buy a Rolls Royce Phantom from a Rolls dealer that accepts bitcoin. The $607,000 transaction would be subject to sales tax. But what about the $557,000 capital gain?
How Governments Tax Crypto
Several years ago, many governments realized cryptocurrencies were something they needed to tax. Guidance documents began appearing in 2014. Here are the highlights from several English-speaking countries.
The US Internal Revenue Service Notice 2014–21: IRS Virtual Currency Guidance describes how American residents and businesses should treat their cryptocurrency transactions.
“In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.”
The IRS treats cryptocurrencies as assets rather than currencies. That means that the tax agency does not treat pure crypto transactions or crypto-dollar transactions as foreign currency transactions. However, crypto trades involving a fiat currency other than the US dollar may be treated as a foreign currency gain or loss.
Individual crypto taxes
According to the IRS, taxpayers must include in their gross income any cryptocurrency they have received as a payment for goods or services. The fair market value of the crypto must be calculated at the time of receipt. Usually, that will mean getting the exchange rate from a reputable crypto exchange.
The IRS specifically addresses cryptocurrency mining. The fair market value on the day of receipt should be included in a taxpayer’s gross income. Although the IRS distinguishes between hobbies and businesses, crypto mining could be considered a form of self-employment. In that case, business taxes would apply.
Selling cryptocurrency on an exchange is just like selling shares on a stock exchange in the eyes of the IRS. Any capital gain or loss associated with that sale should be calculated accordingly.
Business crypto taxes
Independent contractors who receive payment in cryptocurrency must include the value of those payments in their gross income. Self-employment taxes could apply.
If you pay your employees in cryptocurrency, the IRS considers that a form of wages. You will need to withhold a portion of that for federal income taxes, Federal Insurance Contributions Act taxes, and Federal Unemployment Tax Act taxes. No, you can’t pay the withholding in crypto.
If you pay a contractor more than $600 worth of cryptocurrency, then the IRS expects to receive a Form 1099-MISC. This reported miscellaneous income should be the fair market value of the cryptocurrency at the date of the payment.
The IRS provides specific guidance for firms that help merchants accept cryptocurrency. Classifying them as a Third Party Settlement Organization, the IRS expects these TPSO’s to report the transactions. As with the other cases, the cryptocurrency’s fair market value on the date of the payment defines how much to report.
State and city taxes
State and local taxes tend to follow the pattern the IRS established. If your state has an income tax, then you must include any crypto-based income in your state filings. Since sales taxes are not handled federally, each state has its own approach to taxing crypto-based purchases.
The New York State Department of Taxation and Finance, for example, issued a technical memorandum on the subject in 2014. Tax Department Policy on Transactions Using Convertible Virtual Currency defines buying with crypto as a barter arrangement. Since crypto is an intangible property, the person receiving it does not have to pay sales tax. If the goods or services exchanged for the crypto is subject to sales tax, then the recipient has to pay sales tax on the value of those goods. The tax would be based on the fair market value of the crypto at the time of the exchange.
The Washington State Department of Revenue provides similar guidance: “Basically, the same classification(s) apply with the virtual currency that apply on a cash, check, debit card, credit card, gift certificate or stored value card transaction.” Depending on the nature of the sale, the seller will need to collect either sales tax or business and occupation tax. In cases where the seller does not collect taxes, the purchaser must pay the equivalent use tax.
Unfortunately, many states have not defined their positions on crypto sales taxes. Tax experts Jonathan Feldman and Christopher Beaudro wrote about this grey area for Bloomberg’s Daily Tax Report. Taxes could apply, for example, if a state taxes digital goods or digital downloads.
The Canada Revenue Agency (CRA) taxes crypto-based purchases the same way it taxes barter transactions. Buying poutine with bitcoin is no different than trading chickens for poutine.
Trading cryptocurrencies on an exchange, in the eyes of the CRA, is no different than trading stocks or other commodities. The tax laws for securities trading applies.
The CRA’s Digital Currency page explains the CRA’s high-level interpretation of cryptocurrency and links to other CRA Bulletins for more detailed information. At the time this article was published, however, all of those CRA Bulletins have been archived. Those rules may not be applicable anymore. Or there may be more rules. It’s a mystery best addressed by a professional tax advisor.
The Australian Taxation Office has a dedicated, and updated, website to help Australian residents understand their tax obligations. Written in plain English, the site explains how individuals and businesses should report their crypto income.
Notably, the ATO has kept up on trends in cryptocurrencies. It provides guidance for Australians who receive coins in a hard fork such as the split between Bitcoin and Bitcoin Cash. The ATO expects you to use a cost base of zero when you sell the new coin, turning the entire sale into a capital gain.
Individual crypto taxes
As you’d expect, Australia treats cryptocurrencies as assets subject to capital gains taxes (CGTs). Selling, gifting, trading, exchanging, converting and using cryptocurrency are some of the ways Australians can trigger CGTs.
In crypto-to-crypto exchanges, the ATO advises reporting the market value of the received cryptocurrency. If that coin is too esoteric to have a value in Australian dollars, then Australians may use the market value of the traded cryptocurrency.
In crypto-to-fiat exchanges that involve crypto held as investments, any capital gain or loss needs to be included in tax calculations.
Australia has a personal use exemption that could change the way crypto transactions get taxed. The example the ATO gives is someone buying bitcoin to purchase a concert ticket. Since the two transactions are so close together, the ATO classifies that scenario as personal use. The longer you hold the crypto and the less direct the connection between the two transactions, the less likely you are to get the personal exemption.
Business crypto taxes
Cryptocurrency businesses such as Bitcoin ATM operators, crypto exchanges or mining operations are supposed to treat their crypto transactions as trading stock rather than capital gains. For those outside Australia, a trading stock is “anything your business produces, manufactures or acquires, for the purpose of manufacturing, selling or exchanging.”
These crypto businesses can deduct cryptocurrency purchased as trading stock and must report as income any proceeds from the sale of that cryptocurrency.
The ATO expects other businesses that happen to use cryptocurrency to report the activity as they would barter transactions. These businesses must report the value of the received cryptocurrency as ordinary income in Australian dollars. Businesses that use crypto to buy trading stock may deduct the market value of the trading stock.
When businesses use crypto to pay employees, the value of the crypto could be treated as income or as a fringe benefit. Which case applies depends on the nature of the employment agreement.
Her Majesty’s Revenue and Customs (HMRC) issued Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies four years ago. Developed within the context of the UK’s membership in the European Union, the brief does not reflect Brexit, the country’s imminent departure from the EU.
Naturally, nobody knows how Brexit will change Britain’s approach to crypto taxation. The UK could become a crypto paradise — the next Malta. Or regulators could crack down on crypto exchanges to stay in the good graces of Europe’s financial industry.
Britain’s approach to VAT and cryptocurrency had to align with the EU VAT Directive. As a result, VAT does not apply to some aspects of crypto mining, the exchange of crypto for fiat currency or for charges made for carrying out bitcoin transactions.
Businesses that supply goods and services in exchange for crypto do owe VAT. The business must base its VAT payment on the value in sterling of the cryptocurrency at the time of the transaction.
Corporation, income and capital gains taxes
The nature of the transaction determines whether corporation taxes, income taxes or capital gains taxes apply to other cryptocurrency transactions.
Calculating your crypto taxes is not simple, since most tax authorities treat cryptocurrency as an asset rather than as an actual currency. With money, you don’t need to track when you received each bill or coin. Money is money.
With crypto, however, you must keep detailed records of each transaction, matching when you bought and sold each unit. Understanding which taxes apply and how to calculate the tax you owe can be daunting. Don’t risk the fines and penalties tax agencies may impose. Consult with a professional tax advisor who understands crypto.