The taxation of cryptocurrencies is the totality of all commissions a country collects from any crypto transactions within its national jurisdiction. It does not matter by whom these transactions are carried out — by natural persons or legal entities, citizens or entrepreneurs.
However, the tax treatment of cryptocurrency varies greatly. This is partly due to the fact that cryptocurrencies are pseudo-anonymous. Also, states cannot agree on a common policy for the classification of digital currencies. Another reason may be the desire of owners and traders to interact with banks and other old financial institutions as little as possible. Those, as you know, play by rather archaic rules.
So the situation turns out to be a Dutch concert. For example, in Japan, the United States, and Australia, cryptocurrency is treated as property; in Germany, it is so-called private money; in China, it is a virtual commodity. And the British authorities are sitting on the fence.
Tax Regulation of Cryptocurrencies
Crypto users often fear that if they encounter malicious actions from trading platforms, they will have nowhere to turn to solve the issue. Those who make living trading cryptocurrencies or participating in mining are also confused about the uncertainty of the crypto tax regulation. Mining, as we know, in addition to generating income, also requires continuous investment to purchase the latest equipment and pay for electricity, but today miners are not protected by law.
Users need to keep in mind that if they are residents of a country with no official regulatory policy regarding digital assets, they will use them at their own risk. In addition, their counterparties have the full legal right to reject their payments.
Business owners who make any transactions with crypto assets are also interested in the tax certainty of cryptocurrencies. Moreover, for such companies, the favorable position of the state on the legal regulation of digital assets is crucial.
From the above, it is clear that tax regulation falls into two categories:
- natural persons — those engaged in crypto trading and selling and also use cryptocurrency to purchase goods or services;
- legal entities — companies that conduct operations with cryptocurrencies.
In many aspects, cryptocurrency is equated with fiat funds. The income received from transactions with it and other types of income are subject to state taxation.
The main types of income from cryptocurrencies are:
- Cryptocurrency mining;
- Cryptocurrency trading;
- Earning income in cryptocurrency from renting out equipment and premises;
- Getting a salary in cryptocurrency.
The processes on cryptocurrency exchanges are similar to those on stock exchanges. Therefore, similar laws and regulations are applied. Recommendations and regulations for conducting transactions can be found in the definitions of the Arbitration Court’s practice.
Users who invest in cryptocurrency and store it are not required to pay tax for acquisition and storage. The duty of taxation arises in conducting transactions with assets, in other words, when selling and trading.
The same principle applies to determining the number of fiscal deductions. If the investor has suffered a loss from the operation — he/she has the right to declare it. In this case, the amount of deduction will be reduced.
The tax system distinguishes two main types of capital gains tax:
- Long-term — the term of currency storage before operations was no more than a year;
- Short-term — duration less than 12 months.
Depending on the state to which the tax resident belongs and the category of taxpayer, the rates may vary.
For individuals, it is recommended to keep a crypto transaction log, which includes:
- cryptocurrency type;
- transaction date;
- transaction type (purchase or sale);
- transaction amount;
- bank statements, and addresses of crypto wallets.
Taxes on Cryptocurrency for Legal Entities
Transactions of cryptocurrencies owned by the company are regarded by law as commercial activity. There is no minimum period of cryptocurrency ownership that would offset the obligation to pay taxes.
Income tax is applied to individual entrepreneurs and partnerships. Corporate income tax is applied to joint-stock companies and LLCs. Regarding VAT — a question related to the legislation of each country.
Users engaged in mining are regarded by the tax authorities as self-employed. They are subject to personal income taxation. Taking into account the specifics of the legislation, the costs incurred for electricity and storage can be included in the expense item. This reduces the level of deductions.
What If I Don’t Pay Taxes?
The issue of taxation is fundamental if you do not want to have problems with the law. First of all, you need to study how cryptocurrency is classified specifically in your jurisdiction, whether it is property, commodity, digital asset, or something else. In addition, as already mentioned, some countries (e.g., Belarus, Denmark, Singapore) do not tax cryptocurrency transactions at all.
Moreover, users need to know that if they make their crypto transactions on regulated trading platforms, such as Coinbase, then the platform reports all information to the IRS. Decentralized trading platforms are another matter. So far, the question remains open because platforms of this type are not required to report user transactions.
But it is still necessary to remember the transparent nature of the blockchain. Thus, if the government is interested in your activities, it will be able to track your transactions by transaction ID or hash rate.
Crypto Tax Calculators
Whether you are an active crypto trader or an investor, you can make your life much easier and calculate taxes on cryptocurrency using online calculators. The most famous and reliable services are Crypto Tax Calculator, Coin Tracker, and Koinly. It is enough for the user to enter their credentials into the calculator and get the final amount of tax.
In addition, regulated trading platforms often provide their clients with a crypto tax calculator.
Naturally, most jurisdictions intend to strictly control transactions with cryptocurrencies, as they fear that cryptocurrency can create a real threat to national currencies and the entire financial system. Therefore, if you are a crypto trader, miner, or business owner, it is vital to carefully monitor the issue of taxation in your jurisdiction so as not to run into problems with the law.