Paying taxes on cryptocurrency has become more challenging in 2020, with tax authorities worldwide changing their approach to digital assets. To help you navigate these changes, we have compiled a detailed guide to keep you informed about the latest developments.
Cryptocurrencies have gained mainstream acceptance in recent years, attracting the attention of tax authorities in major economies. As trading and prices have surged, gains from crypto-related activities are now being considered taxable income. Developed countries, in particular, have tools to track unreported income.
The acceleration of cryptocurrency taxation began in 2014, with the emergence of Bitcoin and other assets. The significant gains in 2017 prompted tax authorities to revamp their rules and impose stricter regulations to prevent potential hidden income.
Understanding when taxable events occur can help crypto investors make informed decisions and avoid violating local laws. Over the past year, there have been regulatory shifts related to cryptocurrency, with tax regulators actively reminding investors to pay their taxes and issuing guidelines on reporting income. The IRS may also track transactions on some networks.
The level of interest and tax rates on crypto assets vary by country, with rates ranging from zero to as high as 55%. In the US, the IRS applies the 60X rule for futures and options trading, treating 60% of gains or losses as long-term capital gains and 40% as short-term capital gains, but only for forex options and futures.
The legal status of digital currencies, tokens, and coins is generally viewed as a form of ownership, with some tokens considered securities. Worldwide regulations categorize crypto assets as commodities or property, but not as money, currency, or legal tender.
Capital gains from crypto sales involve a rise in the value of assets held, which is realized when the asset is sold. Differentiating between short-term and long-term capital gains is crucial, as the tax rates may vary based on the holding period.
Taxable events in crypto trading can include buying and selling with cryptocurrency, exchanging between different crypto assets, receiving coins from an airdrop or hard fork, and receiving payments in cryptocurrency. Reporting these events can be complex, especially when dealing with hard forks or tokens received for zero value.
US-based forms and exchanges are required to report certain transactions, such as the 1099-K form from exchanges like Coinbase. However, traders may need to fill out Form 8849 to provide more detailed tracking of asset acquisition and disposal, especially when dealing with multiple exchanges.
Ownership of cryptocurrencies is usually pseudonymous, making it challenging for tax authorities to track ownership. However, capital gains realized upon selling digital coins or tokens are taxable events. Tax authorities may consider the receipt of assets as a confirmed transaction and the moment the assets come under control for tax purposes.
Hard forks have posed challenges for cryptocurrency owners, with the IRS issuing guidelines on how to handle coins received from forks. Reporting requirements vary by country, with some jurisdictions offering tax exemptions on crypto transactions.
The UK, for example, treats cryptocurrencies as assets or private money, subject to capital gains tax. Reporting requirements are determined on a case-by-case basis, depending on the nature of the transaction and the parties involved.
In the EU, cryptocurrency trading is treated similar to forex trades, with most countries having varied tax rules and regulations. The EU does not impose VAT on crypto transactions, and the rules differ by country in terms of how digital assets are viewed and taxed.
In Southeast Asia, tax regulations on cryptocurrencies are evolving, with countries like Japan imposing capital gains tax on profits from crypto trading. China, on the other hand, considers all coins and tokens as virtual commodities and has not yet levied taxes on crypto gains.
Russia is still struggling to regulate and tax crypto assets, with trading activities largely flying under the radar of tax authorities. Offshore regions like Singapore, Hong Kong, and Belarus offer tax-free options for crypto sales, while countries like Slovenia and Barbados have favorable tax treatments for cryptocurrency activities.
Tools like Koinly and eToro can help simplify the process of calculating crypto taxes by consolidating exchange information and offering tax calculation services. Mining income is generally treated as regular business income, with miners able to claim expenses to reduce their tax liability.
The best approach to crypto taxation is to maintain detailed records of all transactions and err on the side of reporting to avoid penalties. As regulations evolve and tax authorities become more proactive, it’s essential to stay informed and compliant with local tax laws.
In conclusion, navigating the complex world of cryptocurrency taxation requires careful record-keeping, compliance with local laws, and consideration of the evolving regulatory landscape. By staying informed and using the right tools, you can ensure that your crypto activities are tax-compliant and avoid potential legal issues.
