When the whole crypto game started a few years back, everyone and his mom was basking in the glory of all those lovely gains they were getting...untaxed. But after a while, like all good things, they eventually come to an end and the tax man comes knocking on your door.
Crypto is no different. As regulations come in and the government starts to have a better understanding of what “that Eth stuff is”, you need to start seriously thinking about how you’re going to pay your taxes on the crypto gains you made. Depending on where you live, they might even ask you to pay the back taxes for the years you made gains all the way to 2011. Or you might be lucky and live in a place like Malaysia and not get taxed on crypto at all. Whatever your situation is, you need to understand the types of taxes that are there and what you’re responsible for paying, because with the government, ignorance of the law is never an excuse. Even if they made that law ten minutes ago.
So what types of Crypto taxes are there?
In most countries crypto is approached in three different ways.
- Capital Gains Tax:
- Income Tax:
You don’t need to pay taxSometimes trading in crypto is tax-free depending on where you live or what type of transactions you are doing. In Malaysia for example, you’re only taxed if you trade crypto as a full-time business like a day-trader. But hodling and selling occasionally on a weekly or monthly basis is tax-free. So if you’re making a lot of money from this, it might just be smart to move to a location like Malaysia. Kuala Lumpur is a fabulous city, to say the least! But if you’re not in the mood to relocate, then there are other situations where crypto is free as a bird as well.
- Buying crypto: Buying crypto is not a taxable event in most cases. In fact, when buying crypto the only thing you are paying are the crypto exchange fees, which can vary across exchanges - you can compare crypto exchanges here. So you can literally stack up on a million dollars in crypto tomorrow and pay no tax on that transaction at all.
- Giving someone a gift: In most countries, giving a friend or family member a gift of crypto is also not a taxable event. So this is a great way to share a gift that literally keeps on giving.
- Swaps: When a cryptocurrency changes its underlying technology like when EOS shifted from the Ethereum blockchain to its own EOS MainNet, if you had purchased the original coin and it changed, that’s not a taxable event and you would be safe.
- Donating crypto: In most countries, if you donate to a legit, registered charity, your donations can be claimed as a tax deduction as well. But depending on where you live and how long you have held those crypto assets, the percentage will differ. Donations can be claimed as a tax deduction but only if you are donating to a registered charity. See a list of registered charities here. If you live in the US, donations over $500 need to be reported on your 8283 form. And if your donation exceeds 500k, you’ll need to add a receipt along with your tax return.
- Wallet to wallet crypto transfers: If you decide to move your holdings from your phone wallet to a hardware wallet for example, this would also be considered a non-taxable event. The key thing here is to make sure that you keep track of the transactions so it’s easy to prove that it’s actually you who shifted the money and not some third party who paid you for a service. It’s hard for the tax office to, later on, distinguish between those two types of transactions.
- Hiding your crypto: yes, some people decide to do this because they want freedom from the government’s oversight. If you can manage not to use fiat money to pay for your crypto, then also not spend it on a Lambo, the tax office might just never realize how much you really have :) Good luck with that one.
Do you pay capital gains Tax on Crypto?
Capital gains is basically accounting terminology for the profit you made from the sale of your crypto. Unless you decide to move to Singapore, the majority of other countries you go to will have some form of capital gains taxation for cryptos as well as traditional investments. Let’s take a look at some of the transactions which you’ll be responsible for at the tax office.
- Selling off your crypto holdings: As soon as you get the itch to zoom down the road in your new Lambo and want to sell off your crypto to realize the dream, you’ve thrown yourself into the tax office’s crosshairs. Selling that crypto is a taxable event and whatever profits you made (selling price minus your cost price) is taxable and the government is going to want to wet their beak.
- Trading or exchanging crypto: So your friend just told you that Kusama is going to go wild and Matic is already making her a killing, so you decide to sell off some of your Eth to buy those other two...tax time. This just triggered a taxable event and, again, the government will demand a cut of the action. So when you trade your Ethereum to buy that Kusama, you see that as trading one crypto for another, but the government reads it as you selling Ethereum to buy Kusama. It looks very different in their eyes. And from their perspective, it is a sale for purchase and is therefore taxed, even though the purchase part isn’t taxed as I mentioned above, buying crypto isn’t taxable in most places. Whatever the case, make sure to trade on a reliable exchange. Every exchange review on the Cryptowisser exchange clarifies their specifications, take a look at the Binancereview here.
- Online shopping: Many cool cryptos like Shopping.io and StormX allow you to buy things online from regular shops like Addidas and get crypto cashback on your purchases and pay with crypto. These are all taxable events because you’re using your crypto to make a purchase for an item, even if it’s not another crypto, it’s a purchase nonetheless and the government wants a cut. This one catches many people off guard because they think they are out of the crypto loop, but they are not.
You’re taxed on your crypto income
Regardless of where you live, income tax is probably a reality of your life, the difference is usually just in the percentages taken. When it comes to crypto, it’s no different. If you’re an individual or a business you need to pay income tax on the crypto that you earn, the key thing is understanding what consists of “income” for the government, so let’s take a look.
- You get your salary or payments in crypto: Yes, that salary you just got in BTC or ETH is not going to escape, unfortunately, and you have to pay income tax on it like you would on a regular salary at a regular office job. The key difference is that there is technically no record of you getting it from any exchange, especially if you live in one country and get paid online from your company that’s based i another country. So, you need to declare your earnings and you’ll be taxed on the market value of the crypto at the time you received it.
- Mining crypto: So you setup a cool rig and you’re pulling in that ETH or BTC and dreaming of the new kitchen you’re going to put in the house with the gains. Stop right there...taxes. Yes, your mining is taxable as well. Everything you mine is considered an income for you. If you’re doing it full-time or part-time, sometimes there’s a discrepancy with tax offices, so check, but it is considered income. You will also need to pay capital gains tax later on when you decide to sell that crypto you mined, so essentially you’re taxed twice if you’re a miner.
- Airdrops & Staking: These are also considered income and need to be declared properly on your forms. So it’s advisable that you consider very well what airdrops you choose to be a part of because you might end up paying taxes on a bunch of coins you didn’t even really want to hold. Staking rewards are much the same. If you stake on PancakSwap for example, all that sweet extra $CAKE you made has to be shared with the tax office and depending on where you live, the slices will be bigger and bigger**.**
So now you have a pretty good idea of what the reality of holding crypto in 2020 is all about in relation to taxes. And you need to understand that the government won’t leave you alone anymore to make those gains in the dark, so preparing yourself to deal with them is the key to surviving the encounter. Unless you decide to escape to one of those warmer, crypto-friendlier nations of the world.
About the author: Aniekan U. is one of the writers at Cryptowisser.com. With a background in technology and Crypto, he has a well-rounded view of the space and loves to research blockchain topics.