Paying taxes on cryptocurrency has become increasingly challenging in 2020, with tax authorities worldwide changing their approach to digital assets. To help navigate these changes, a comprehensive guide has been put together to provide the latest updates.
Cryptocurrencies have gained mainstream attention in recent years, prompting tax authorities in leading economies to take notice. As trading and prices soared, gains from cryptocurrency activities are now being considered taxable income. Developed countries, in particular, have the tools to track unreported income.
The acceleration of cryptocurrency taxation began in 2014 with the emergence of Bitcoin and a few other assets. The significant gains in 2017 prompted tax authorities to revamp their rules and implement stricter regulations to address potentially hidden income.
Understanding when taxable events occur is crucial for crypto investors to make informed decisions and avoid breaching local laws.
Over the past 12 months, there have been regulatory shifts related to cryptocurrency taxation. Tax regulators are not only passively reminding investors to pay their taxes but are also issuing specific guidelines and warnings on income reporting. The level of interest tax authorities have in crypto assets varies by country and region, with tax rates ranging from zero to as high as 55%. The IRS’s 60X rule for futures and options trading currently only applies to forex options and futures.
The legal status of digital currencies, tokens, or coins is generally considered a form of ownership, with some tokens categorized as securities. Worldwide regulations differ, but no country has recognized digital assets as money, currency, or legal tender. Crypto assets are typically classified as commodities or property, with capital gains realized upon the sale of a digital coin or token being the most important concept for tax purposes.
Reporting income from cryptocurrency trading is complex, as each nation has its own set of rules. Regulations vary by country, making it essential for individuals to understand their specific tax situation and the events that need to be reported.
Capital gains from crypto sales occur when the value of an asset held, such as ownership of digital assets, increases. Reporting short-term capital gains, where an asset is held for less than a year, may require a detailed log of all trading activity and gains or losses realized.
Taxable events in cryptocurrency trading can include using crypto for buying and selling, exchanging between crypto assets, receiving coins or tokens through airdrops or hard forks, and receiving payments in the form of crypto assets. The IRS’s treatment of hard forks and tokens received for essentially zero value is still unclear, leading to uncertainty regarding the fair value of such assets.
US-based exchanges are required to produce specific forms for tax reporting, such as the 1099-K form, which may not accurately reflect gains or losses due to the nature of cryptocurrency transactions. To avoid confusion, US citizens may need to fill out form 8849 for more detailed tracking of asset acquisition and disposal.
Ownership of cryptocurrencies is relatively pseudonymous, making it challenging for tax authorities to track ownership until assets are sold or exchanged in a traceable manner. While crypto gains are generally taxable, there are still opportunities for transactions or trades to remain outside the scope of tax authorities.
Hard forks have been a contentious issue for cryptocurrency owners, with the IRS issuing guidelines on taxable events related to hard forks. However, the lack of clarity on receiving coins in a hard fork has led to calls for revisions to avoid high tax bills for worthless assets.
The UK tax authority, HMRC, takes a case-by-case approach to cryptocurrency transactions, requiring individuals to report gains made based on crypto assets. Differentiating between sporadic activity and regular trading is essential, as the latter may be subject to income tax instead of capital gains tax.
Taxation rules in the EU vary by country, with some regions treating digital coins and tokens as a form of private money or property. Capital gains from cryptocurrency transactions may be taxable, but the specific rules depend on local tax rates and types of taxes.
In Southeast Asia, Japan, and China, cryptocurrency taxation approaches differ significantly. Japan levies capital gains tax on crypto sales, with rates ranging from 15 to 55%, while China considers all coins and tokens as virtual commodities. Singapore, Thailand, and Hong Kong have their own tax rules for cryptocurrency transactions, with varying levels of taxation and reporting requirements.
Russia is still struggling to regulate cryptocurrency activities, with trading currently flying under the radar of tax authorities. However, new legislation may be in the works to track and tax cryptocurrency transactions in the future.
While some offshore regions offer tax exemptions for cryptocurrency sales, it is essential to report income from cryptocurrency activities to avoid penalties. Tools like Koinly can help track transactions and calculate tax liabilities more efficiently.
Mining income is typically treated as regular business income, with miners able to claim expenses to reduce their tax basis. The best approach to cryptocurrency taxation is to report all activities and keep detailed records to accurately calculate tax liabilities based on regional rules.
Overall, the world of cryptocurrency taxation is evolving, with tax authorities increasingly focusing on tracking and taxing cryptocurrency gains. Staying informed and compliant with local regulations is essential to navigate the complex landscape of cryptocurrency taxation.
