Cryptocurrency is, of course, an electronic currency. What makes it unique are the large number of security measures that have been implemented to ensure its authenticity and validity. Whether you’re new to cryptocurrency or already own coins, finding out if it’s taxed is something every crypto investor should know the answer to, and we’re going to be breaking the matter down in the following paragraphs.
1. Location
Tax regulations are a part of the wider legal system. They vary from country to country, and they can be made on a federal or a state-level within a single country, and this is the first important distinction you need to make when it comes to cryptocurrency taxation. To put it simply, the tax requirements in Australia will differ from the ones in France. And when it comes to countries like the USA, usually, what gets taxed is determined on the federal level, but how it’s taxed can differ from state to state. In other words, cryptocurrencies are considered property for tax purposes by the IRS, but the rules governing their taxation may be different from state to state. Some countries have been relatively silent on the matter, while others have taken a harder stance and demanded that taxes be paid on virtual currency transactions. The ATO (Australian Tax Office), for example, considers crypto to be a digital asset or property, and subjectable to taxation as such. It’s important to note that in both of these cases, mining would most likely be considered taxable as well.
2. Trading Crypto?
The second element that needs to be taken into consideration is how the cryptocurrency in question is treated for tax purposes. When there are regulations in place, cryptocurrencies are usually treated as a type of property when it comes to taxation, which means that if you sell them for a profit, the gains will be considered capital gains. Obviously, this is one of the things you should look into if you want to start trading crypto. In simple terms, capital gains are the profits you make from the sale of an asset, and they’re taxable in most cases. Now, there are a few things you can do to reduce the tax burden on your capital gains, but that’s a topic for another day. Similarly, If you receive cryptocurrency as payment for goods or services rendered, it will be taxed in the same way as regular income is. In some cases, employers have started paying their employees in cryptocurrency.
3. Investing In Coins?
Another option is that you’re buying crypto, but aren’t selling. If you store your coins in a digital wallet, then their taxation will probably be handled differently. Again, and this cannot be stressed enough – this will largely depend on state laws – the person that’s selling the coins is probably going to be the one that pays taxes on them, while the buyer doesn’t necessarily have the same obligation. However, if the law regards cryptocurrency as property – and there’s a property tax in general where you live, it might also mean that simply owning crypto is taxable as well. Looking at different forums on the subject that are catering to your specific location is a good place to start. The website of the government body that’s in charge of taxes should be your next stop. In most countries, they will have relevant sections of the law up on their page, and you can read it for yourself to make certain. That said, there’s a reason why law school is so demanding – the law isn’t always easy to interpret if you’re not an expert, so talking to a lawyer that specializes in taxation or better yet -cryptocurrency, might also be of some help.
4. Gross Worth
In a lot of countries, there’s a non-taxable stipulation. That means that if the worth of something is less than a certain amount, it cannot be taxed. However, what that refers to, and what’s the set number, is highly specific to each country. That’s because the economic conditions, the average types of income, as well the buying power wildly differ across the board. So, the exact amount will, again, depend on your location. However, since a lot of coins can be bought by the decimal, it is possible to get a (part of a) high-value coin, and still not have to pay taxes on it because its worth isn’t significant enough. That said, if the country you’re in doesn’t differentiate between other monetary currencies and cryptocurrency, or other property and coins (depending on how crypto is defined by law) – the worth of coins you own will be added to your general worth, and taxed as such.
5. Specific Coins
Of course, it’s not just Bitcoin anymore. There are over a thousand coins out there (and counting) and each of them is different. It’s a fast-growing industry, and the law is generally more slow-paced. If crypto is regulated in your country, you might want to check how that’s phrased – there might be a legal loophole you can use. For example, since Bitcoin was the star of the show for a long time, the lawmakers might have used “Bitcoin” instead of “Cryptocurrency” when regulating it and hadn’t come back to revise the phrasing yet. While that’s admittedly not the most likely scenario, it is worth checking out. You might find that you’re in luck! If they specified that not all cryptocurrencies but one or more of them specifically are taxable, that could imply that the other coins aren’t, which would mean that as long as you don’t own or trade-in the coins regulated by the law in your country, you don’t have to pay taxes either.
6. Objective Constraints
To preface this, if there is any kind of legal obligation for you to pay taxes on the coins you own or trade on, you should always do it because not doing so might mean you’re committing fraud. That said, sometimes there are things that are the written law, but that have no real way of being enforced. In other words, even if the country you live in states that crypto is taxable, the government might not have a way to actually check if you’ve done everything by the book. Or it simply might not have interest in pursuing cases that are under a certain amount (even if it’s above the non-taxable one defined by law) due to insufficient resources and manpower. In cases like these, it would be your legal, and some would argue moral, duty to report your earnings yourself and pay your due taxes by your own initiative and in the time frame required by the law.
Cryptocurrency is a tricky subject when it comes to taxes. Depending on where you live, the regulations surrounding it might be very clear, or they might be more ambiguous. That said, you should always consider these 6 factors if you’re trading in crypto, and follow the law wherever it may apply.
