Taxes can differ widely from one jurisdiction to the next. Some countries even have significant taxation discrepancies between their regions. The only constant when it comes to cryptocurrencies and taxation, virtually anywhere in the world, is that when you make a cryptocurrency transaction to pay for something or as a result of a trade, you are almost certainly creating a taxable event. Here is your complete guide to crypto tax:
Understanding How Crypto is Taxed
In some cases, where you live doesn’t even matter. If you are a US citizen, for instance, the IRS requires you to file a tax return and even pay taxes in the US if applicable, even if you live elsewhere. Therefore, even if you have tax exemptions on your cryptocurrency holdings where you live, the IRS will tax you.
Cryptocurrency Taxation in the US
Regardless of where you live, if you are a US citizen, you should know that the IRS now asks you to declare whether you hold cryptocurrency or not. Based on this declaration, taxes might be applicable. The IRS will consider your cryptocurrency holdings as property, which implies the following:
- Bitcoin and cryptocurrency trading will be taxed based on the USD profit upon the sale of the asset.
- You must provide base prices – the price of the asset when you bought it – and sale prices. The tax will be calculated based on the profit.
- If you lost money on cryptocurrency trade, the IRS would give you a deductible capital loss.
- Any cryptocurrency transaction that involves trading one asset for another, paying for a good or service is taxable according to US law.
- Exchanges that deal with the US markets are compelled to file reports with the IRS, which means that if you fail to declare your cryptocurrency, you might get caught
- Forks, mining, staking, and airdrops are taxed as income; they do not get the same treatment as stock splits.
- Cryptocurrency gifts are treated as stock gifts.
- However, if you hold your cryptocurrency in foreign exchange, then you might not get taxed on it. You must declare it anyway.
If this doesn’t make sense it is because taxing an asset that exists only on a decentralized public ledger that resides simultaneously in thousands of computers across the globe, is a nightmare for governments.
Other Countries like Canada have more sensible Cryptocurrency Tax Codes
Taxation in other countries is different, but the same events that the IRS taxes are likely to also be taxable elsewhere. Nevertheless, if you are not a US citizen, you might get away with a little more than what the IRS allows you to.
For instance, in Canada, Bitcoin is taxed as a medium of exchange that is used for barter. This means that Bitcoin and cryptocurrency transactions produce similar taxable events as they do in the US, but the approach to taxing them is different:
- The CRA – Canadian Revenue Agency – taxes transactions based on the spot price of Bitcoin or the cryptocurrency in question, at the time of the transaction.
- If you are a trader, this means that you will be taxed on what you gained from the sale of said cryptocurrency
- Whether your transaction is subject to VAT or not depends on whether you bought and sold for a profit at an exchange, or whether you used cryptocurrency to buy a good or service.
- Likewise, if you sold your own services to a non-Canadian resident for cryptocurrency, VAT would not apply.
Canada’s cryptocurrency tax code might seem a little weird, but it is more advantageous. Additionally, there are no questions about your cryptocurrency holdings on Canadian tax returns. The disadvantage for Canadians is that if they hold their coins in foreign exchange, they might still need to pay taxes on them. Canadians that do not reside in Canada for tax purposes will only have to pay cryptocurrency taxes where they live.
Cryptocurrency Taxation in the EU
The countries comprising the European Union offer fantastic crypto tax codes as compared to the US and Canada. Although each country is responsible for its own tax policies, there is one pan-EU crypto tax recommendation that arose from the European Court of Justice – which supersedes local court rulings – that is particularly favorable for cryptocurrency holders. The court ruled that cryptocurrency is money, which means that no VAT should be charged on cryptocurrency transactions.
This is one key area in which the EU crypto tax differs from US and Canadian laws. Nevertheless, this EU-wide ruling has its limitations depending on the country where the taxes are being levied. In this complete guide to crypto tax, here is a shortlist of EU countries and how they tax crypto:
- Much like in Canada, taxing depends on what crypto is being used for
- Germany’s crypto tax requires users to pay VAT if the transaction results in the purchase or sale of goods or services
- Otherwise, Germany levies taxes on cryptocurrency traders if they made more than 600 EUR on their trades or held their digital assets for less than a year
- Crypto tax in the Netherlands looks a lot like a crypto tax in Canada
- The Netherlands considers cryptocurrencies to be an instrument of barter
- Taxes are levied based on the user’s income bracket
- Danish crypto tax is probably the most liberal in Europe
- Individuals are not taxed on their cryptocurrency trades
- Businesses dealing with cryptocurrencies are taxed according to the existing tax code
- Crypto tax in France is a mixed bag
- Traders making regular profits from crypto trading will be taxed according to the rules for “industrial and commercial gains”
- Anyone who profits from crypto trading sporadically will be taxed according to noncommercial profit tax rules
Other Crypto Tax Codes
There is a myriad of other crypto tax codes within the EU as well as throughout the world. They all have a common thread: cryptocurrency transactions are judged individually to see if they create a tabled event or not. The problem with this approach is that it depends on people or exchanges reporting the transactions to the government.
You might take the risk of trading on a foreign-based exchange and avoid reporting, but you must be aware of the perils of doing so. At any given point in time, the country that hosts that exchange and the country you live in can sign a taxation treaty and your information might be disclosed to your local tax agency.
Also, if you are trading Bitcoin or other non-zero-proof coins, the address at your exchange will be forever associated with your ID. Blockchain forensic experts can then map transactions out, making it easier for authorities to catch you.
Therefore, it is better to find out how the cryptocurrency tax code works where you live and how it applies to you. File your taxes and make sure you stay on the right side of the law.
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