How Is Cryptocurrency Taxed in 2021 And What You Need to Know?
There is an old proverb that says that two things are certain in life: death and taxes. Many people want to know: do you pay taxes on cryptocurrency assets? The short answer is yes. Many countries have their own cryptocurrency tax laws, and citizens must report their crypto holdings and pay the necessary taxes. Certain nations are considered crypto havens because you aren’t required to pay a cryptocurrency tax if you live there.
How much you will be owed to pay will depend on where you live and your crypto activities, such as buying, selling, trading, or mining. So, if you are active in the crypto world, take some time to assess everything you do because you could be asked to pay a Bitcoin tax at the end of the financial year.
Cryptocurrency And Taxes: What Activities Are Taxable?
Paying taxes is a tricky topic, so let’s try to break it down step by step.
Bitcoin and other digital currencies are, in most cases, not considered legal tender. Some countries, like the USA, consider them a type of property. That means there is a capital gains tax on cryptocurrency. However, you are only required to pay the tax if and when you sell your coins.
A purchase of a crypto asset is not a taxable action. You can keep your coins on an exchange or in your private wallet. That activity alone isn’t subject to a cryptocurrency tax. Likewise, if you never sell or exchange your coins, you never owe anything. An unsold asset is considered an unrealized gain.
Can Cryptocurrency Be Taxed When It’s Sold?
Yes! When a coin is sold, and you generate a profit, you are required to pay a capital gains tax. The same rule applies if you use your digital currencies to purchase goods and services. However, keep in mind that only your gains are taxable and not the entire amount.
If you purchased $1.000 worth of Bitcoin and the value of your portfolio increased to $1.500 when you sold or exchanged it for goods, you will need to pay a Bitcoin tax on those $500 of profit.
Taxes And Cryptocurrency When Trading
Whenever you perform a trade on a cryptocurrency exchange where you trade one coin for another, each of those trades become subject to the same capital gains tax. As a result, you will be taxed on the difference between the money you spent when you bought the first asset and the gains you made when you exchanged it for the second one.
Cryptocurrency Tax Short-Term vs. Long-Term
A person’s tax rate depends on how long they hodled their asset. Therefore, it’s essential to distinguish between short-term and long-term capital gains.
- If you sell Bitcoin after holding it for more than a year, you will need to pay a long-term capital gains tax.
- If you keep your coins for less than one year, your profit will be considered a short-term capital gain.
There is a significant difference between making short-term and long-term profits when it comes to taxes and cryptocurrency. Authorities ask for lower taxes when an asset is kept for longer periods. Short-term capital gains are taxed based on a person's regular tax rates and how much money they make overall. This includes your salary, property, stocks, crypto, precious metal assets, etc. Your short-term capital gains tax on cryptocurrency can be between 10% and 30% depending on your total income.
Holding crypto long-term offers a more favorable taxing treatment. Individuals who earn less than $40.000 a year pay no long-term capital gains taxes at all. If your regular tax rate is 28%, you will only need to pay a 15% long-term capital tax, for example. As you have realized by now, there is a great incentive in holding your assets for more than a year, especially if you are making significant profits.
How Is Cryptocurrency Taxed When the Investor Incurs Losses?
Some people could fear that your national tax office only takes a cut when you make a profit, but it’s your own fault when you lose. Luckily, that’s not true. If you traded crypto and experienced losses, you don’t need to pay any capital gains tax on that event. The money you lost is deductible from the total amount you are required to pay. Capital losses need to be reported so that the loss can be written off in this or the next financial year when the time comes to pay that cryptocurrency tax.
Bitcoin Tax on Mining, Airdrops, and Crypto Loans
What do cryptocurrency tax laws say about mining or receiving Bitcoins as part of an airdrop? Suppose you are a crypto miner who receives rewards for securing the blockchain. In that case, the entire value of your mined coins is taxable once they are exchanged for fiat or goods or services. If you received an airdrop or a payment from a marketing campaign, the entire sum is subject to capital gains tax.
Lending platforms allow customers to get a fiat loan by using their crypto as collateral. The cash you loan is not taxable, and you can do whatever you want with it. Paying back the loan and receiving your crypto back is also not a VAT eligible event. Only if the loan isn’t paid back will the person be subjected to taxes.
Cryptocurrency And Taxes Around the World
Cryptocurrencies are subject to VAT in most parts of the world. Some countries have banned them altogether, while in others, digital coins are tax-free.
The United States
Citizens of the USA pay a capital gains tax on cryptocurrency between 0% and 37%. The payable rate depends on how long the asset has been in one’s possession. A short-term capital gains tax is paid if the coin is sold within a year. If the digital currency is kept longer than a year, a long-term capital gains tax will be required.
Canada
Canadian cryptocurrency tax laws are different depending on the nature of the trade. For example, if it’s a crypto-related business venture, an income tax is paid on the entire amount. However, on a personal level, a Canadian citizen must only pay a capital gains tax on 50% of the taxable sum.
The United Kingdom
Cryptocurrency and taxes in the UK are similar to those in the US. A person who holds certain coins as a personal investment will need to pay a capital gains tax when their assets get liquidated. Selling, mining, and exchanging crypto all are taxable events. If the sale incurs a capital loss, the amount can be deducted if reported.
Germany
Do you pay taxes on cryptocurrency in Germany? Well, it depends. German cryptocurrency tax laws consider digital coins as private assets. That means that you aren’t required to pay a capital gains tax but rather an income tax.
German nationals who have owned cryptocurrencies for one year or more don’t need to pay any taxes for liquidating their positions. An income tax will be calculated if coins are sold within one year of holding. Recorded gains up to €600 per year are VAT-free.
China
In May 2021, the national government of China issued a statement disallowing all banks and payment institutions from providing services to cryptocurrency holders and traders. Although it isn’t considered illegal to possess Bitcoin and other coins, this ban effectively renders them useless on Chinese soil.
Australia
Australian tax authorities view crypto as an asset. So, how can cryptocurrency be taxed down under? Capital gains taxes are applied to domestic taxpayers who hold digital assets. If those coins have been kept for 12 months or more, only 50% of the profits are taxable.
Taxes And Cryptocurrency Elsewhere
Many countries can be considered tax havens because crypto is non-taxable in those territories. These nations have understood that cryptocurrencies improve their local economies and have legalized all crypto ventures. Most of these countries look at digital coins as personal investments or private money and not as legal tender or medium of exchange, making them tax-exempt.
Citizens of these nations pay no income or capital gains tax on crypto. However, the same laws don’t apply to legal entities and crypto businesses who sometimes represent an exception to the rule.
Let’s now have a look at the most crypto-friendly nations in 2021 with lenient cryptocurrency tax laws:
- Belarus
- Hong Kong
- Malaysia
- Portugal
- Singapore
- Slovenia
- Switzerland
- Cayman Islands
Bottom Line
Crypto holders need to be aware of the obligations they have when it comes to cryptocurrency and taxes. Most jurisdictions view digital coins either as property or assets, making investing in them similar to dealing with stocks or real estate.
Although the opinions on crypto might be different, tax authorities usually agree that it needs to be taxed. As we have seen, local governments often demand a capital gains tax when a coin is traded for fiat or used as a medium of exchange for specific goods or services. However, certain benefits are, in some cases, offered for long-term holding. If the investor incurs capital losses, those can be deducted.
The following activities are considered taxable:
- Selling crypto for fiat.
- Exchanging one coin for another.
- Using cryptocurrencies to purchase goods or services.
A non-taxable event doesn’t require a cryptocurrency tax. Those actions include buying and storing crypto in an exchange or private wallet and transferring digital assets from one wallet/exchange to another.
Laws and regulations can change, so it’s essential that you stay up to date with what is happening in your jurisdiction and place of residence. In case of any uncertainty, don’t hesitate to consult a bookkeeper or your local tax authority.
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