The proliferation of cryptocurrencies and crypto trading has led to a lot of questions about how crypto taxes work around the world. Many investors want to know, is crypto tax-free?
The short answer is no. However, every country has a different approach to taxing cryptocurrencies, and some countries levy different tax rates or apply different rules for different kinds of crypto transactions.
In the US, for example, the IRS states that cryptocurrency trades are taxed using the same capital gains tax rules that apply to stocks. Traders must pay a higher short-term capital gains rate if they hold tokens for less than one year. They can also offset losses against their gains from crypto, stocks, or other investment assets.
Our crypto taxes premier guide will cover everything readers need to know about crypto taxes around the world, from the US and UK to Australia, India, Europe, and beyond. We’ll also explain how different types of crypto transactions are taxed and how to report crypto income when filing taxes. Keep reading to find crypto taxes explained in detail.
What Are Cryptocurrency Taxes?
Just like individuals have to pay taxes on investments like stocks and bonds, they also have to pay taxes on cryptocurrency investments.
In fact, many countries around the world have updated their tax codes in the past few years to write new rules specifically for cryptocurrency income. These rules vary from country to country, but most countries tax crypto just like stocks.
That means that individuals pay cryptocurrency taxes in 2023 mainly when they sell. In most countries, there is no tax for buying cryptocurrency and investors don’t have to pay taxes on their crypto for as long as they hold it.
Cryptocurrency is generally taxed at the same capital gains tax rate as stocks and bonds. Capital gains include any money an investor earns from buying and selling investable property.
The capital gains tax rate can be as low as 0% or as high as 37% in the US. Other countries have different capital gains tax rates. In general, the amount you’ll be taxed on crypto depends on your total income, how much money you made from selling crypto, and how long you held your crypto before selling it.
Crypto can also be taxed as regular income. This is the case when investors earn profits from crypto staking, interest, or even receiving wages in crypto tokens. For these types of transactions, crypto users will report their gains alongside all of their other income.
All of that said, there are a few countries that let you buy and sell crypto tax-free, at least under certain circumstances. These countries include Germany, Switzerland, and Singapore, among others.
Crypto taxes in a nutshell
Crypto taxes include capital gains taxes and income taxes. Taxes on capital gains are typically higher than those on income from crypto.
How Are Cryptos Taxed in 2023?
In most countries around the world, profits from buying and selling cryptocurrencies are taxed as capital gains. This means they typically follow the same tax rules as other investments such as stocks.
Capital gains taxes apply when investors realize a profit from selling an asset. In other words, crypto investors only pay taxes when they sell their crypto, not when buying it or holding it.
The capital gains tax rate that investors will pay depends on four key factors:
- The country the investor is paying taxes in
- How long the investor held their crypto for
- The investor’s total annual income
- The total amount the investor made from selling crypto
The investor’s total annual income is especially important. Capital gains tax rates vary based on an individual’s income level in many countries.
So, an investor who makes $500,000 per year might pay a higher capital gains tax rate than an investor who makes $50,000 per year, even if they make the same amount of money from selling cryptocurrency.
Some countries tax profits from cryptocurrencies as ordinary income rather than capital gains. This can result in investors paying a lower tax rate on their crypto, or even no taxes if they are below a certain income threshold.
In addition, profits from certain crypto-related activities, such as crypto mining, are taxed as ordinary income.
Understanding Crypto Taxes Around the World
We’ll take a closer look at crypto taxes by country around the world, including crypto taxes in the US and crypto taxes in Europe.
USA
Capital Gains Taxes
The methods for how crypto is taxed in the US are very similar to how stocks are taxed.
Crypto transactions in the US are taxed as capital gains if you:
- Sell crypto to realize a profit in fiat currency
- Make a profit from crypto trading
- Spend crypto on goods or services
There are two classes of capital gains taxes in the US.
- Short-term capital gains apply if you held your crypto tokens for less than one year. The short-term capital gains tax rate is the same as an investor’s income tax rate. This ranges from 10% to 37% depending on their total annual income.
For example, say an investor bought $5,000 worth of crypto in March and sold it for $7,000 in May. Since the tokens were only held for 2 months, the investor will pay short-term capital gains tax on their $2,000 profit.
- Long-term capital gains apply if you held your crypto tokens for greater than one year. The long-term capital gains tax rate is 0% for individuals who make up to $44,625 per year, 15% for individuals who make up to $492,300 per year, or 20% for individuals who make more than $492,300 per year.
For example, say the same investor bought $5,000 worth of crypto in March, but didn’t sell it until May the next year for $7,000. Since the tokens were held for 14 months, the investor will pay long-term capital gains tax on their $2,000 profit.
When calculating net profits for capital gains, investors may subtract any investment losses from their gains. If individuals have a net loss from crypto or other investments, they will pay no capital gains taxes and can apply their losses to any capital gains earned the following year.
For example:
- Say an investor bought Bitcoin in March for $5,000 and sold it in May for $7,000. They made a $2,000 profit.
- The same investor bought Ethereum for $5,000 in June and sold it for $4,500. They made a $500 loss.
- The investor can offset their $500 loss against their $2,000 profit, so they’ll only pay capital gains tax on $1,500.
Income Taxes
Certain crypto transactions in the US are taxed as ordinary income. These include:
- Crypto mining
- Receiving wages in crypto
- Airdrops
- Crypto earned as interest or from staking
- Crypto earned from creating and selling non-fungible tokens (NFTs)
There are 7 income tax brackets in the US with tax rates ranging from 10% to 37%.
The crypto from these transactions is taxed as ordinary income, and the crypto is taxed again as a capital gain when it is sold for fiat. So, these transactions are effectively taxed twice.
UK
Capital Gains Taxes
Crypto transactions in the UK are taxed very similarly to the US. Crypto transactions are taxed as capital gains if you:
- Sell crypto to realize a profit in fiat currency
- Make a profit from crypto trading
- Spend crypto on goods or services
The capital gains tax rate is 10% for individuals with net income up to £50,270 per year, or 20% for individuals making more than this amount. Investors don’t have to pay capital gains taxes on their first £6,000 in capital gains each year.
The UK does not offer different tax rates depending on how long an investor holds their cryptocurrency.
Income Taxes
Other crypto transactions are taxed as income. These include:
- Crypto mining
- Receiving wages in crypto
- Airdrops
- Crypto earned as interest or from staking
- Crypto earned from creating and selling NFTs
The UK has 3 income tax brackets: 20% on the first £37,700 in income, 40% on income between £37,700 and £125,140, and 45% on income above £125,140.
Canada
Capital Gains Taxes
Crypto transactions in Canada are taxed as capital gains if you:
- Sell crypto to realize a profit in fiat currency
- Make a profit from crypto trading
- Spend crypto on goods or services
Only half of an investor’s capital gains are taxed as capital gains in Canada. The remainder are taxed as ordinary income. The capital gains tax rate ranges from 15% to 33% and depends on an individual’s total income.
Canada does not offer different capital gains tax rates depending on how long an investor held their cryptocurrency.
Income Taxes
Cryptocurrency transactions that are taxed as income tax in Canada include:
- Crypto mining
- Receiving wages in crypto
- Airdrops
- Crypto earned as interest or from staking
- Crypto earned from creating and selling NFTs
Canada has 5 income tax brackets with rates ranging from 15% to 33%.
Germany
Capital Gains Taxes
There are no capital gains taxes on crypto in Germany.
Income Taxes
All transactions involving cryptocurrency are subject to income taxes in Germany.
However, investors who hold their crypto tokens for at least one year will pay no taxes when selling their crypto in Germany. If selling staked crypto, the tokens must be held for at least 10 years.
If investors hold cryptocurrency for less than one year, it is taxed as ordinary income. The first €600 in annual profits from cryptocurrency held less than one year are not taxed.
Income tax rates in Germany range from 0% to 45%.
Switzerland
Capital Gains Taxes
Switzerland does not charge capital gains taxes on most investments, including cryptocurrencies. However, Switzerland does charge a wealth tax on cryptocurrencies.
Wealth tax rates are set individually by each canton in Switzerland. Investors cannot offset gains from crypto investments with losses when calculating their wealth tax.
Income Taxes
Switzerland charges income taxes on cryptocurrency transactions including:
- Crypto mining
- Receiving wages in crypto
- Airdrops
- Crypto earned as interest or from staking
Federal tax rates in Switzerland range from 0% to 11.5%. Each canton in Switzerland also charges income taxes that can range from 0% to 19%.
France
Capital Gains Taxes
Investors will pay capital gains taxes in France if they:
- Sell crypto to realize a profit in fiat currency
- Spend crypto on goods or services
- Airdrops
- Crypto earned as interest or from staking
Notably, there is no capital gains tax when traders swap one crypto for another.
Crypto investors will pay a flat capital gains tax rate of 30% no matter their income. The first €305 in capital gains each year are tax-free. Traders can deduct losses during the same tax year, but they cannot apply losses from one year to reduce taxable profits the next year.
Crypto mining taxes are 45% in France.
Income Taxes
There are no additional income taxes on profits from crypto transactions in France.
Australia
Capital Gains Taxes
Investors will pay capital gains taxes on crypto in Australia when they:
- Sell crypto to realize a profit in fiat currency
- Make a profit from crypto trading
- Spend crypto on goods or services
There are two classes of capital gains taxes in Australia:
- Short-term capital gains apply to crypto tokens that were held for less than one year. These gains are taxed at an individual’s income tax rate.
- Long-term capital gains apply to crypto tokens that were held for one year or longer. Only 50% of long-term capital gains are taxed.
Investors can carry forward capital losses to apply them to capital gains in any future year.
Income Taxes
The following types of crypto transactions in Australia are subject to income tax:
- Crypto mining (non-professional miners do not pay income tax)
- Receiving wages in crypto
- Airdrops
- Crypto earned as interest or from staking
- Crypto earned from creating and selling NFTs
Income tax rates in Australia range from 0% to 45%.
New Zealand
Capital Gains Taxes
New Zealand does not levy capital gains taxes on any investments, including cryptocurrencies.
Income Taxes
All cryptocurrency transactions that generate a profit are subject to income tax in New Zealand. Income tax rates range from 10.5% to 39% over 5 income tax brackets.
New Zealand allows investors to deduct cryptocurrency losses from their gains. Net losses can also be carried forward to future years.
India
Capital Gains Taxes
India charges capital gains taxes on investors who:
- Sell crypto to realize a profit in fiat currency
- Make a profit from crypto trading
- Spend crypto on goods or services
The capital gains tax rate for cryptocurrencies is 30%. Investors who sell more than 50,000 INR worth of crypto in a single year will pay an additional 1% tax on the amount over that threshold.
Investors cannot offset losses against crypto gains when calculating their capital gains tax in India.
Income Taxes
Some crypto transactions qualify as ordinary income and are taxed at lower rates:
- Crypto mining (non-professional miners do not pay income tax)
- Receiving wages in crypto
- Airdrops
- Earning crypto from interest or staking
Income tax rates range from 0% to 30% over 6 income brackets.
Singapore
Capital Gains Taxes
Singapore does not levy capital gains taxes on profits from any investments, including cryptocurrencies.
Income Taxes
Most crypto transactions in Singapore are not subject to income tax as long as the investor is not a professional trader. Professionals and businesses that earn crypto as business income must pay business income taxes on it.
Brazil
Capital Gains Taxes
Brazil requires investors to pay capital gains tax whenever they:
- Sell crypto to realize a profit in fiat currency
- Make a profit from crypto trading
- Spend crypto on goods or services
Investors only have to pay capital gains tax if their monthly sales volume exceeds R35,000. This means that investors who spread their sales over multiple months can avoid paying capital gains taxes on some or all of their earnings from crypto trades.
Brazil’s capital gains tax rate ranges from 15% to 22.5% based on an investor’s total capital gains. Losses can be used to offset up to 30% of an investor’s gains.
Income Taxes
Other crypto transactions qualify as ordinary income and are taxed at lower rates:
- Crypto mining
- Receiving wages in crypto
- Airdrops
- Earning crypto from interest or staking
Income tax rates in Brazil range from 7.5% to 27.5%.
Chile
Capital Gains Taxes
Chile does not levy capital gains taxes on crypto investments.
Income Taxes
Profits from any cryptocurrency transaction are treated as taxable income in Chile. The country’s income tax rates range from 0.4% to 35%.
Investors cannot deduct losses from crypto investments from their gains.
South Africa
Capital Gains Taxes
South Africa requires investors to pay capital gains tax whenever they:
- Sell crypto to realize a profit in fiat currency
- Make a profit from crypto trading
- Spend crypto on goods or services
- Gift crypto to another individual
Only 40% of an investor’s capital gains are subject to capital gains tax and investors can use losses to offset gains. The capital gains tax rate is 18%.
Income Taxes
Other crypto transactions qualify as ordinary income and are taxed at lower rates:
- Crypto mining
- Receiving wages in crypto
- Airdrops
- Earning crypto from interest or staking
Income tax rates in South Africa range from 18% to 45%.
Crypto Tax-free Countries
Wondering how to avoid crypto taxes in 2024? There are currently 11 no crypto tax countries that charge virtually no taxes on digital assets.
Singapore
Singapore doesn’t levy either capital gains taxes or income taxes on cryptocurrencies as long as the tokens are not business income. That means non-professional crypto investors, traders, and miners won’t pay any taxes on their crypto profits.
Malaysia
Malaysia does not require non-professional crypto investors to pay any taxes on profits from crypto. Businesses that accept crypto and professional traders must pay income tax on crypto profits.
Germany
Germany offers tax-free crypto trading and investing as long as the tokens are held for at least one year. Crypto earned through staking must be held for at least 10 years before it can be sold tax-free.
The first €600 in annual profits from short-term crypto investments are not taxed, either.
However, profits from short-term crypto investments over €600 are subject to income tax. Earnings paid in crypto, profits from short-term crypto staking, and profits from crypto mining are also subject to income tax.
Belarus
Belarus is offering a tax holiday for all crypto transactions until at least January 1, 2025. There are no capital gains taxes or income taxes on crypto transactions in the country.
Portugal
Up until this year, Portugal had no taxes on cryptocurrency transactions. Now, only profits from crypto investments held for at least one year are completely tax-free.
Profits from short-term crypto investments are taxed at a rate of 28%. Profits from mining, airdrops, staking, and interest earned on crypto are taxed as ordinary income.
Malta
Profits from long-term crypto investments are completely tax-free in Malta. However, crypto trading is taxed as business income, which carries a tax rate ranging from 0% to 35%.
Switzerland
Switzerland doesn’t charge any taxes on profits from crypto trading or investing.
However, the country does have a wealth tax on investments, which is set by each individual canton. In addition, profits from crypto transactions like mining, staking, and interest are taxed as ordinary income.
Georgia
Individuals do not pay any capital gains or income taxes on crypto transactions in Georgia. Businesses must pay a 15% corporate income tax on profits from crypto.
Cayman Islands
Cayman Islands does not charge any capital gains or income taxes on crypto transactions. This is also true for businesses, which don’t pay any corporate tax on profits from cryptocurrencies.
El Salvador
El Salvador was the first country in the world to consider Bitcoin to be legal tender. That means that all businesses in the country must accept Bitcoin.
Crypto transactions are tax-free for individuals and foreign investors in El Salvador. Businesses must treat payments made in crypto as ordinary income when reporting business profits.
Crypto Taxes Stats
To put crypto taxes in context, it’s important to know a bit more about the state of crypto around the world.
- What percentage of the world uses cryptocurrency: 4.2%
- Which countries use cryptocurrency the most: US, India, Pakistan, Nigeria, Vietnam
- How many people use crypto: 420 million
- Market cap of all cryptocurrencies: $1.2 trillion
- Estimated revenue from crypto taxes in US: $28 billion over 10 years
- Crypto taxes collected in India in 2022: $19 million
- How many global crypto owners pay taxes: 0.53%
- How many US crypto holders pay taxes: 1.63%
- Countries with highest crypto tax payment rates: Finland, Australia, Austria
Check out our guide to Bitcoin mining and energy statistics for more crypto trading statistics and cryptocurrency statistics by country.
How to Report Crypto on Tax Returns
There are two ways that profits from crypto are reported on taxes: as capital gains and as income.
The process for how to file crypto taxes varies by country. In addition, where to report crypto on tax return forms depends on whether profits are taxed as capital gains or regular income.
In most countries, profits from crypto trades must be reported as capital gains. This includes profits from short-term trades, long-term investments, and swaps between tokens. Transactions that effectively cash out an investor’s crypto, such as buying products online with Bitcoin, are also reported as capital gains.
To report capital gains, investors must know the net profit they earned from a transaction and how long they held the position for. Most countries allow investors to subtract any losses from their profits, reducing their overall tax burden.
In the US, the place where to report cryptocurrency on taxes for capital gains is IRS Form 1040 Schedule D.
In the US, crypto users can use IRS Form 1040 to report their income.
Wondering when are crypto taxes due? The answer is that they’re due on the same date as all other taxes. In the US, that’s usually April 15 each year.
Are There Any Tax-free Crypto Transactions?
We’ve talked a lot about what crypto transactions are taxable. However, not all crypto transactions are treated equally under tax laws. Let’s take a closer look at different types of crypto transactions and how they are taxed.
Buying Crypto
In most countries, there is no tax for buying crypto. Most countries that have VAT tax don’t charge it for crypto investments.
However, once an individual owns crypto, they could be taxed for selling it, spending it, or earning income from it through DeFi platforms or staking.
HODLing Crypto
Very few countries tax individuals simply for holding crypto. Investors need to earn income or realize a profit in order to activate taxes.
One of the few exceptions is Switzerland, which has a wealth tax. The wealth tax is calculated based on an individual’s total wealth, including the value of any crypto investments.
Selling Crypto
Selling crypto for fiat incurs a tax in most countries. Most countries tax profits from selling crypto as a capital gain. However, there are a few that treat profits from a crypto investment as regular income.
In some countries, investors may be able to sell crypto without a tax. One example is Germany, where crypto investors who sell crypto after holding it for at least one year won’t pay capital gains tax on their profits.
Another thing to keep in mind is that investors typically won’t pay crypto taxes if they sell their tokens for a loss. In the US and other countries, losses can be offset against gains. So, there are times when selling crypto can actually reduce an investor’s tax bill.
Transferring Between Crypto Wallets
Transferring tokens between crypto wallets that an individual owns is typically tax-free. This is not considered a sale or change in ownership, which would be a taxable transaction.
However, transferring tokens to another individual’s wallet has tax implications. Even if the tokens are a gift, the transaction must be reported to tax authorities.
Buying Goods and Services with Crypto
Many countries treat buying goods and services with crypto as if the individual had cashed out their crypto for fiat. They must pay capital gains tax on the purchase amount.
Businesses that receive crypto in exchange for goods and services must report that crypto income as ordinary business income. They may pay additional taxes if they sell that crypto for fiat.
Crypto-to-crypto Swaps
Whether crypto-to-crypto swaps are taxable varies widely between countries. Some countries consider profits from swaps to be capital gains—essentially taxing this transaction as if the trader had sold crypto for fiat.
Other countries do not tax crypto-to-crypto swaps, even if a profit is made from the swap. Traders are only taxed when they cash out their crypto for fiat.
Crypto Loans
Loans are not considered income in most countries, regardless of whether they are in fiat or crypto. As a result, crypto loans are generally tax-free.
That said, any income earned using a crypto loan can be taxed. For example, if an investor uses tokens from a crypto loan to earn staking income, then the staking income can be taxed.
Crypto Interest
Crypto interest, such as from DeFi platforms, is taxed as ordinary income in most countries. An individual’s tax rate will depend on their income tax bracket.
Note that crypto interest is effectively taxed twice in most countries: as income when the interest is earned, and as a capital gain when the individual cashes out their crypto for fiat.
Crypto Staking
Profits from crypto staking are treated as ordinary income in most countries, just like profits from crypto interest. Investors must report any crypto or other assets they earn as a result of staking.
If an investor earns tokens from staking, they will effectively pay taxes on those tokens twice: first as regular income when the tokens are earned, and again as capital gains when they sell those tokens to realize a profit.
Crypto Derivatives
Crypto derivatives are taxed according to each country’s rules on the specific type of derivative in question. For example, in the US, there is no difference in taxation between commodity futures and crypto futures. Profits from both are subject to capital gains taxes.
Similarly, profits from trading crypto on margin are taxed just like profits from crypto trading that doesn’t involve margin. So, margin traders will pay capital gains tax on their profits in most countries.
Crypto Mining
Taxation around crypto mining is highly variable. Some countries treat all profits from crypto mining as ordinary income, so it is taxed at an individual’s income tax rate. Other countries treat all profits from crypto mining as business income and charge business tax rates.
A few countries, including Australia, waive taxes on income from crypto mining for non-professional miners.
Crypto Gifts
Crypto gifts are tax-free in some countries, but not in others. In the US, for example, crypto investors can gift crypto tax-free. In the UK, crypto gifts are tax-free only if they are to a spouse.
In Ireland, crypto gifts are taxed at the country’s 33% short-term capital gains tax rate. In Spain, there is a gifts and inheritance tax that applies to crypto gifts.
Importantly, the gift recipient will have to pay taxes on any profits they earn from the gift. In most countries, profits are calculated based on a token’s value at the time the gift was received.
For example:
- An investor purchases $10,000 worth of crypto, then gifts it to their spouse.
- The investor will not have to pay taxes on that crypto, no matter what happens to its value.
- The spouse sells the crypto for $15,000 a few years later. They only need to pay taxes on the $5,000 in profit from appreciation since they received the crypto. They do not pay taxes on the entire $15,000 profit.
Crypto Donations
Many countries allow investors to donate crypto tax-free. This is the case in the US, UK, and Australia, as long as the recipient is a registered charity.
In other words, an investor who donates crypto will not pay taxes on it, even if it appreciated from when they originally bought the tokens.
Investors cannot claim a tax deduction for their donation, as they could for cash donations in most cases.
Can Centralized Financial Regulators Monitor Your Crypto?
Under certain circumstances, financial regulators and tax authorities such as the IRS can monitor individuals’ crypto holdings and trades.
In the US, centralized crypto exchanges report customers’ trades to the IRS using Forms 1099-K and 1099-B. Investors receive these forms, which document their taxable trades, at the end of each year. Copies are also sent to the IRS, which can use them to ensure that investors pay any taxes they owe on their crypto trades.
A brief list of which crypto exchanges report to the IRS includes:
- Coinbase
- Crypto.com
- Gemini
- Kraken
- Binance.US
- Robinhood
- PayPal
Many centralized crypto exchanges don’t report trades to tax authorities in other countries. Decentralized crypto exchanges also don’t report trades.
However, that doesn’t mean financial regulators aren’t aware of crypto activity. On-chain data can be used to trace transactions back to certain wallets and individuals. In addition, if a crypto investor is audited, the tax regulator must be given access to their crypto wallet addresses as part of the investigation.
Can tax officials track my crypto transactions?
Tax authorities can monitor crypto transactions on centralized exchanges. They can find out about transactions on decentralized exchanges through audits and on-chain data.
Consequences of Not Reporting Cryptocurrency Taxes
Failure to report crypto taxes is treated similarly to failure to report other tax liabilities in the US and most European countries.
If a tax agency suspects that an investor is not paying their crypto taxes, the agency can solicit an audit. Individuals are legally required to comply with the audit.
The exact consequences for not reporting crypto taxes depend to some extent on the reason for the reporting failure. If an investor mistakenly fails to report crypto taxes or doesn’t understand their liabilities, they will likely need to pay back taxes, interest, and fines.
On the other hand, if an investor willfully misreports their crypto tax liabilities or tries to hide their crypto holdings from tax authorities, they could face criminal charges for tax evasion. The maximum penalty for tax evasion in the US is a $250,000 fine and up to 5 years in prison.
How to Minimize Crypto Taxes
There are several ways that crypto investors can legally reduce the amount of taxes they owe on their profits. Let’s take a closer look.
1. Invest Using an IRA
An Individual Retirement Account, or IRA, is a tax-advantaged investment account designed for retirement investing. Profits earned in an IRA, including from crypto, are completely free from capital gains taxes.
The catch is that there is a limited amount investors can deposit in an IRA each year. They also can’t withdraw funds from an IRA until age 59.5 without facing penalties.
When an investor withdraws money from an IRA, they’ll still pay income taxes on the withdrawal. Alternatively, investors can invest with a Roth IRA. With a Roth IRA, investors pay taxes on their income before depositing into the investment account, then pay no taxes when making withdrawals.
2. Invest for the Long-term
In the US, long-term capital gains are taxed at lower rates than short-term capital gains. This means that investors who hold their cryptocurrency positions for at least one year will generally pay less in taxes than those who trade more frequently.
Tax considerations shouldn’t overrule considerations about when is a good time to buy and sell. It’s still more important to make a profit when trading crypto than to take a loss because an investor was worried about taxes. However, when all else is equal, holding positions for at least a year can result in a lower capital gains tax bill.
3. Gift Crypto to a Family Member
In many countries, including the US, it’s allowable to gift crypto and other investments to a family member. When crypto is gifted, it’s not considered sold and no capital gains taxes are levied. The individual who receives the crypto can sell the tokens immediately and pay no crypto taxes on them.
There are a few caveats to keep in mind. First, there is a limit on how much an investor can gift tax-free. This amount varies from country to country. In the US, it’s $17,000 worth of crypto per year.
In addition, if the family member who receives the crypto holds it, they will have to pay taxes on any capital gains they earn from the moment they received the crypto.
4. Use Losses to Offset Gains
If an investor has capital losses—whether from crypto, stocks, or another investment asset—they can use those losses to offset their taxable capital gains.
As an example, say an investor sells crypto for a $10,000 profit but sells stock for a $4,000 loss in a single year. They can use the $4,000 loss to offset their $10,000 gain, so they only have to pay capital gains taxes on a total of $6,000.
This creates a lot of possibilities for investors to reduce their tax bill. Tax loss harvesting is a common approach by which investors cut their losses on losing positions in a year in which they have otherwise done well in the market. They get to eliminate bad investments while also paying less in taxes on their profitable investments.
Calculating Crypto Taxes – How It’s Done
Calculating crypto taxes can be complex. We’ll explain how to calculate crypto taxes with a detailed example.
- Say an investor buys $10,000 worth of Bitcoin at the start of the year. By May, the price goes up 20% and their Bitcoin is worth $12,000.
- They sell half at that price, and hold the remaining $6,000. For that tax year, the investor would only have to pay taxes on the half of their position that they sold for a profit.
- Their cost basis—what the investor paid originally—was $5,000 (half of the original $10,000 investment). Their proceeds (gross profit) were $6,000. So, their net profit was $1,000.
- This trade took place over 5 months, so it’s classified as a short-term capital gain. Depending on the investor’s income tax bracket, they’ll pay anywhere from $100 to $370 (10% to 37%) of their $1,000 profit in taxes.
How to Calculate Crypto Taxes
To calculate crypto taxes, investors need to know their cost basis, proceeds, and date bought and sold for every position.
Now let’s say that the investor sold their remaining Bitcoin position the following February.
- By this time, Bitcoin has gone up again and the position is worth $8,000.
- The cost basis was $5,000 and the proceeds were $8,000, so the investor owes taxes on a net capital gain of $3,000.
- This is a long-term capital gain since the position was held for 13 months. So, the investor will pay $0 to $600 (0% to 20%) in taxes depending on their total income for the year.
This gets more complicated when an investor has more trades or swaps one coin for another. However, the calculation is ultimately the same. Investors need to know their cost basis and gross profit for each position along with how long they held the position.
How to Claim Crypto Losses on Taxes
In many countries, including the US, investors can use losses on crypto to offset their gains. The process for calculating losses is the same as for calculating gains.
There is no spot on tax forms for where to report crypto losses on taxes. Instead, investors simply subtract their losses from their gains and report the net.
Here’s an example of how this works:
- Say an investor buys $10,000 worth of Bitcoin in January and then sells it in May for $15,000. Their profit is $5,000.
- The same investor buys $10,000 worth of Bitcoin in September and sells it for $8,000 in November. Their loss is $2,000.
- The investor can use their $2,000 loss to offset taxes on their $5,000 gain. So, the investor will only pay capital gains tax on a net profit of $3,000.
Best Accounting Methods to Use for Crypto Taxes
In countries that charge different tax rates for short-term and long-term gains, how investors account for their crypto positions matters.
For example:
- An investor buys $1,000 worth of Bitcoin in January
- The same investor buys $2,000 in June
- The following February, they sell $1,000 worth of Bitcoin
Did they sell the Bitcoin they bought in January for a long-term capital gain? Or did they sell half of the Bitcoin they bought in June for a short-term capital gain?
The answer depends on the accounting method the investor uses.
So, let’s take a look at some common accounting methods for crypto taxes.
First In, First Out
The first in, first out (FIFO) accounting method is the one most commonly used by investors. Under this scheme, investors automatically sell the oldest position they have of an asset.
So, in the example above, the investor would have sold the Bitcoin they bought in January. Since they held that Bitcoin for 13 months, they’ll pay long-term capital gains tax on their profits.
Last In, First Out
The last in, first out (LIFO) accounting method allows investors to sell their newest position in an asset. This can be useful if an investor’s oldest position is, say, 10 months old, and they want to maintain it so that it can be counted as a long-term capital gain. They can sell their newest position, which might be only a few days old, and pay short-term capital gains taxes on it.
To give an example:
- An investor buys $1,000 of Bitcoin in January
- The same investor buys $2,000 worth of Bitcoin in October
- The investor sells $1,000 worth of Bitcoin in December.
In this case, the LIFO accounting method would be advantageous. The Bitcoin purchased in January isn’t yet eligible for the reduced long-term capital gains tax rate, but it will be soon. It’s better to sell the Bitcoin purchased in October, which isn’t close to the 12-month mark.
Importantly, investors must choose one accounting method for all of their positions for a tax year. The default accounting method is FIFO. If an investor wants to use LIFO, they must confirm their accounting election with all investment brokerages and crypto exchanges they use.
Do Crypto Brokers and Exchanges Provide Tax Forms?
Crypto exchanges may provide tax forms, but don’t assume they include all of your transactions. It’s up to investors to report transactions that exchanges don’t capture.
Investment brokers that offer crypto and centralized exchanges do provide tax forms in the US and most other countries. In the US, the forms provided are typically Form 1099-B, Form 1099-K, and Form 1099-DA.
Form 1099-B lists all of the transactions an investor made with their broker or exchange. It shows the assets purchased, the cost basis and gross profit for each position, and the net profit from each position. Using this data, investors can easily see the total profit (or loss) they earned on a short-term basis and the total profit (or loss) they earned on a long-term basis.
Form 1099-K shows any credit card transactions an investor made with a crypto exchange. It does not reflect capital gains or losses and the information on this form does not need to be reported to the IRS.
Form 1099-DA is a new form designed to replace Form 1099-B for digital assets. It is not currently in use and isn’t expected to be issued to investors until at least 2024. Form 1099-DA has not yet been finalized, but it is expected to include the same information as Form 1099-B.
Importantly, the tax forms that crypto brokers and exchanges provide may not cover all of an investor’s crypto tax liabilities. That’s because exchanges only track transactions that happened on the exchange.
If an investor transfers digital assets to another wallet outside the exchange and then places trades (such as through a decentralized exchange), the exchange will not know about these trades and will not report them on Form 1099-B. So, Form 1099-B will not include profit or loss that investors are still required to report.
Investors should look at all transactions made across their wallet addresses using a blockchain explorer tool like Etherscan to ensure they accurately report all of their transactions.
Important Things to Include When Reporting Crypto Taxes
There are a number of metrics that investors need to report when filing crypto taxes. These metrics are included in Form 1099-B. However, they must be reported manually for transactions that aren’t included in Form 1099-B, such as any transactions that take place on decentralized exchanges.
- Cost basis: The amount that an investor paid to open a crypto position. If an investor swapped from one crypto to another, they must calculate the value of the opened position in USD.
- Gross proceeds: Also called gross profit. This is the total amount that an investor received when selling a crypto position. For crypto swaps, crypto values must be calculated in USD to determine gross proceeds.
- Date received: The date that a new position was opened.
- Date disposed: The date that a position was closed.
- Total capital gain or loss: The total capital gain or loss is equal to the gross proceeds for a transaction minus the cost basis. A profitable transaction will have gross proceeds that are higher than the cost basis.
How to Use Crypto Tax Software to Report Taxes
Crypto tax software can save crypto investors a huge amount of time come tax season. They can also eliminate manual errors or underreporting that can lead to audits and fines.
Crypto tax software essentially serves as an automated crypto taxes calculator. Here’s how it works:
- The software connects to an investors’ crypto wallets and exchange accounts.
- It imports all of the transactions and matches them across wallets.
- The software calculates all of the metrics required for crypto tax reporting such as cost basis, gross proceeds, and total capital gain or loss.
- Crypto tax software classifies income from staking, crypto interest, or mining. This is important since profits from these types of transactions are taxed differently from profits from crypto trading in many countries.
- The software delivers a report that investors can use to report their crypto taxes to tax authorities. Some platforms even integrate with popular tax accounting software such as TurboTax.
Which crypto tax software is best for a specific investor depends on what country they’re in, what software they use to file income taxes, and what exchanges and wallets they use to manage their crypto.
How to Keep Track of the Latest Crypto Tax News
Crypto tax regulations are constantly changing, and it’s up to investors to know their responsibilities when it comes time to report their taxes. So, crypto investors need to keep an eye on the latest tax news from regulators and exchanges.
One of the best ways to stay on top of changing regulations is to simply monitor tax authorities’ websites. Most agencies, like the IRS, have news bulletins when crypto tax reporting requirements change. They also highlight new forms and provide reminders to investors.
Crypto media outlets are also good resources for tax news. Especially around tax time, many major outlets run stories reminding crypto investors of reporting requirements and highlighting new rules that have come into effect in the past year.
Investors can also check crypto tax software providers’ blogs. These blogs often bring attention to new rule changes and explain in detail how they affect crypto investors. Crypto tax software is also updated frequently to adapt to changing rules, so using it can help investors avoid missing new requirements.
Finally, Reddit is a good source of information about crypto tax changes. Crypto taxes on Reddit are a hot topic and there are experienced tax professionals willing to give help.
Conclusion
It’s important for every crypto investor to understand their tax obligations and how to report their crypto holdings to tax authorities. Investors are required to pay taxes on crypto gains in most countries around the world, and failure to pay appropriate taxes can result in back-taxes and fines.
The rules for crypto taxation are complex and vary by country. In general, profits from crypto are taxed as capital gains, income, or both. Crypto investors should strongly consider using crypto tax software to ensure that they don’t miss any reporting requirements or opportunities to reduce their tax bill.
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