How should bitcoin and crypto be taxed? Most of the world’s governments have decided that crypto is as an asset, and not as a currency. So the day you make a profit from your investment is the day you owe the taxman Capital Gains Tax. Here’s what that means for your cryptocurrency investment.
Why property and not a currency?
While most of us understand crypto to be a currency in its own right, this is not the way our governments have decided to swing. Cryptocurrencies are not considered money in most parts of the world, as it does not have legal tender. The exception, right now, is El Salvador, which became the first country to accept bitcoin specifically as legal tender in June 2021.
Legal tender, like a dollar note, or even a gold bullion coin, does not get taxed as capital. In fact, it really doesn’t get taxed at all. That is, the money itself is not taxed. This is a different story if you’re a forex trader and you’re making money off the sale of poor performing fiat currencies. But in everyday terms, it's the act of making money through realising a profit, or by working for it, where the taxes come in.
So while crypto could be viewed and certainly used as legal tender, that would be no fun for the taxman. Instead, crypto is classified as property in most countries, and property is an ‘asset’ for tax purposes.
What is an asset?
Now that we know that cryptocurrencies are assets and not currencies, let’s look at what defines an asset.
An asset is anything - tangible or intangible - of value that can be converted into cash. An asset is typically acquired as some sort of investment, with the intention to cash out one day in the future. Assets can be owned by individuals, and these are called personal assets. Assets can also be owned by a business, as fixed or current assets, for example.
Either way, an asset can be tangible or intangible:
Examples of intangible assets include goodwill, copyrights, trademarks, intellectual property, savings accounts, insurance policies… and cryptocurrency.
Examples of tangible assets include investment property, personal property like a boat or jewelry, collectibles such as art, antiques, wine, shares, and office equipment.
How are assets taxed?
We know that your crypto investment is viewed as an asset by most tax authorities around the world.
When that asset changes hands - either by sale, swap or as a gift - this event is what's known as a disposal. If there is a profit at the point of disposal, the profit can be taxed as a capital gain. Before you can arrive at a profit, you need to know what your Cost Basis was - in essence what the cost of the crypto asset was.
Cost Base = cost of the crypto you bought + any fee that was involved in the acquisition of that asset, like a brokerage fee or a transaction fee.
Here's an example. If you buy 1 coin for nine hundred and ninety dollars, with a ten dollar transaction fee, your cost base is one thousand dollars. This cost base will be the baseline from which you measure any future profits.
Next, a capital gain is calculated by subtracting the price you bought the crypto for (cost-basis) from the price you are selling it for.
Capital Gains Tax
A capital gain is the profit or loss you make from trading or selling any asset, including crypto:
Capital gain = selling price - buying price - fees
Your buying price + associated fees are also known as the cost-basis or just basis in accounting lingo.
For example, if you bought 1 BTC for 1000 USD and also paid a fee of $10, then your cost basis is $1010. If you later sell the Bitcoin for $1500 then you will realize a capital gain of $1500 - $1000 - $10 = $490. You will have to pay a capital gains tax on this amount - we will go deeper into how much tax you will have to pay in the next section.
When do you pay CGT?
In order to pay Capital Gains Tax you need to realise a gain, which typically happens when you sell your crypto asset and make a profit. But a sale is not the only way that you might realise a gain. Each time an asset changes ownership it triggers a taxable event called a disposal. CGT kicks in at the point of disposal - when there's a profit.
In most, but not all countries, you could pay CGT on your crypto disposals in these situations:
- Selling: Profits from selling crypto for Fiat = CGT
- Swapping: Profits from swapping crypto with crypto = CGT
- Spending: Using cryptocurrency to purchase goods and services = CGT
- Gifting: Perceived profits made from gifting crypto = CGT
Gifting is taxed in Australia, Ireland in the UK, unless the crypto gift is given to a spouse or civil partner.
How much do you pay?
In most countries, the amount of capital gains tax owed on crypto depends on how long you’ve held your assets, and in which income tax bracket you are. Typically, the higher your income, the greater the percentage of tax you'll pay on capital gains.
Some countries will allow a certain amount of capital gains to be tax-free. In Germany for example, total capital gains under €600 per year are tax-free, and crypto sold after a holding period of one year is tax-free. Australia offers a 50% Capital Gains Tax discount on crypto held for a year or more.
Short term Capital Gains Tax
Typically, any gain made from the disposal of a crypto asset - held less than a year - is taxed at the same rate as your personal income tax rate.
Long term Capital Gains Tax
Many countries allow special treatment for gains made on assets that were held for at least one year for example.
- USA applies a reduced capital gains tax rate from 0%, 15% or 20% tax depending on individual or combined marital income.
- Australia allows a 50% capital gains discount
- Germany does not tax capital gains on crypto held for more than 1 year.
What is a Capital Loss?
Just as your crypto disposals can raise a profit, they can also introduce a loss. Most countries allow investors to carry their capital loss forward, to offset against capital gains in later years. Koinly can track this for you, potentially saving you on future tax bills.
Crypto Capital Gains Tax in the USA
In the United States, how much capital gains tax you owe for your crypto activity depends on how long you’ve held your assets and in which income tax bracket you are.
- Allowances: If your income is under $40,000 a year, you'll pay no Capital Gains Tax. For married couples filing jointly, the limit is $80,000 a year. For the head of household, this limit is $53,600 a year.
- Short-term capital gains: Any gain made from a crypto asset held less than a year is taxed at the same rate as you Federal Income Tax bracket. You could pay between 10% to 37% tax.
- Long-term capital gains: Any gains or losses made from a crypto asset held for longer than a year incurs a much lower 0%, 15% or 20% tax depending on individual or combined marital income.
- Losses: If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 21 of Schedule D (Form 1040). If your net capital loss is more than this limit, you can carry the loss forward to later years.
In the US, CGT is paid on these crypto disposals:
- Profits from selling crypto for fiat like USD.
- Profits from swapping crypto with crypto.
- Using cryptocurrency to purchase goods and services.
Crypto Capital Gains Tax in Australia
In Australia, the amount of capital gains tax owed on crypto depends on how long you’ve held your assets and in which income tax bracket you are.
- Allowances: There are no specific allowances for Capital Gains Tax in Australia. However, if your total income is less than $18,200 a year, you won't pay any Income or Capital Gains Tax.
- Short-term capital gains: Any gains or losses made from a crypto asset held less than a year are taxed at the same rate as whatever Income Tax bracket you’re in.
- Long-term capital gains: Any gains from a crypto asset held for longer than a year receives a 50% Capital Gains Tax discount.
- Losses: Losses can be carried forward and deducted from capital gains in later years.
There is no time limit on how long you can carry forward a net capital loss.
In Australia, CGT is paid on these crypto disposals:
Crypto Capital Gains Tax in the UK
In the United Kingdom, the amount of capital gains tax owed on crypto depends on how long you’ve held your assets and on your individual Income Tax Rate.
- Allowance: UK residents are allowed an allowance of capital gains that are non-taxed for individuals up to £12,000 in capital gains across all capital assets
- Losses: The time limit for claiming capital losses is within four years of the end of the tax year in which the capital loss was realised.
In the UK, CGT is paid on these crypto disposals:
How do you report your Capital Gains?
A crypto tax calculator like Koinly will show you gains from coins that were sold after 1 year of purchase as long-term capital gains in your tax report. This makes it easy to apply a reduced capital gains tax rate or discount on such assets.