What kind of taxes apply to crypto? In most countries, just 3 taxes: Income Tax, Capital Gains Tax and No Tax (or tax free). Find out which tax applies to your crypto activity in 2023 in our super simple crypto tax category guide!
Wondering how to report your crypto activity in your tax return? In most countries where crypto is taxed, like Australia, Canada, UK and USA - generally only 3 types of taxes apply to crypto. Wondering how the taxman is going to get you? Step into the light with our easy crypto tax guide!
How is crypto taxed?
In most countries where crypto is taxed, three tax scenarios apply:
- Tax free
- Capital Gains Tax
- Income Tax
These are the top crypto tax types that most of us will need to know about, and apply broadly in Australia, Canada, the USA, the UK, Sweden, Denmark and France, to name a few. A notable exception is Germany - see our German Crypto Tax Guide here.
Crypto Tax Type 1: Tax Free
Believe it or not, not every aspect of crypto trading is taxable. In some cases, you might not have to pay any tax at all. Here's a rundown of the most common crypto scenarios where no tax applies:
Purchasing crypto is not taxed, so if you bought a whole stack of crypto and still own it, good news for you!
Feeling generous? In the USA gifting is tax-free up to $16,000 per friend or family member. This is an awesome way to shave off some of your crypto taxes.
If the gift exceeds $16,000 in value - you still won't pay tax provided you're under the lifetime gift tax free allowance of $12.06 million. But you will need to complete a gift tax return using Form 709 (USA). The gift can be sent in multiple transactions as long as the total does not exceed the threshold amount towards any single person.
In most other countries, gifting is usually taxed - though there are a couple of exceptions for gifts to spouse or civil partners in the UK and Ireland.
Tax free (USA)
When a cryptocurrency changes its underlying tech for ex. when EOS went from the ETH blockchain to the EOS mainnet or when DAI changed its contract address and named the old coin SAI - there are no tax liabilities.
It doesn't matter if the coin is being swapped at a 1:10 ratio or 1:1 ratio, as long as the value of your holdings remains unchanged, you will not have to pay tax on the swap.
Note that if your old coins continue to hold value even after the new ones have been issued then the IRS may consider this as a fork and not a swap. Forks are taxed as Income.
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.
The amount of deductions varies depending on how long you have held the assets:
- If you owned the crypto for more than 1 year, you can deduct upto 30% of your Annual Gross Income (AGI).
- If you owned the crypto for less than a year you may deduct upto 50% of your AGI and the lesser of cost-basis or the FMV of the donated coins.
Donations over $500 have to be reported on Form 8283. It is very important to get a receipt of your donation as the IRS is likely to request it. If your donation exceeds $500,000 you will need to send the receipt along with your tax return.
Tax free & deductible
Transferring crypto between own wallets
Transfers between your own wallets or exchange accounts are not taxed but it's important to keep track of these transactions so you can prove ownership of the sending and receiving wallets in case of an audit.
It can be difficult to distinguish transfers to own wallets from payments to third parties, so it's a good idea to use a crypto portfolio tracking tool like Koinly to keep track of this for you. The free plan on Koinly allows up to 10,000 transactions which is more than enough for most!
Crypto Tax Type 2: Capital gains tax
A capital gain is the profit or loss you make from trading or selling 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.
Here's a breakdown of the most common crypto scenarios and where capital gains tax is applicable:
When you begin selling off your crypto, that's when the tax liabilities come in.
Say you bought 1 BTC and sold it at a $1000 profit. This profit is taxed as a capital gain. Depending on how long you held the coin, your profits will be taxed either at the long term or the short term tax rate (more on the tax rates later).
Capital gains tax
Trading or exchanging crypto
Trading one crypto for another (ex. BTC → ETH) is also a taxable event.
The IRS sees a trade as 2 separate transactions, first you are selling your BTC for X amount of fictional dollars, then you are buying ETH with these fictional dollars.
Even though you never received any dollars in hand, you still have to pay tax on the sale of the BTC. The purchase of ETH is not taxed as you learnt earlier.
Capital gains tax
Trading with stablecoins
Stablecoins are also cryptocurrencies and taxed in the same way as any other crypto to crypto trade.
The benefit of stablecoins is that as long as its price doesnt deviate from $1 you wont have to pay any additional capital gains taxes when you trade the stablecoin for some other crypto. This makes them somewhat similar to fiats as far as taxes are concerned. Note that you still need to keep a record of the stablecoin trades for tax purposes.
Capital gains tax
Participating in an ICO / IEO
Participating in an ICO or IEO triggers a taxable event as you are exchanging a cryptocurrency for another i.e. the tokens that will be issued in the future.
The transaction is taxed when you receive your tokens - not when you participate. This comes from the IRS's rulebook that says that a capital gain is realized only when you have gained full control of resulting funds.
Capital gains tax
Paying for stuff online
Whether you are paying rent, buying an old TV or paying for a netflix sub with cryptocurrency, you are still taxed in the same way as when you sell crypto.
This transaction is similar to the crypto to crypto scenario above. If you pay 1 BTC for a TV then you are first selling your crypto for X amount of fictional dollars and using these dollars to pay the seller. The disposal of your BTC is therefore taxed as a capital gain.
Capital gains tax
A margin trade involves borrowing funds from an exchange to carry out a trade and then repaying the loan afterwards. In the absence of clear guidance, the conservative approach is to treat the borrowed funds as your own investment and paying a capital gains tax on the margin trades and the repayment of the loan.
Think of it as taking out a loan against your house to buy crypto, there's nothing stopping you from doing this and as long as you repay the original loan + interest, you get to keep all the profits (less taxes of course)!
Note that if you are paying interest on this loan in crypto then the interest payment would be subject to capital gains tax since it is a disposal.
Capital gains tax
Futures / contracts / options trading with crypto
In futures trading, you are not actually buying or selling any crypto. Instead you are speculating on the rise or fall of the price of a crypto asset in the future. When the future arrives you will either make a profit or a loss (Pnl).
There is no guidance from the IRS on how this Pnl should be taxed but there are 2 possible tax categories that this can fall into:
Note: If you are using Koinly to calculate crypto tax then you can control how the Pnl is taxed on the Settings page.
Capital gains OR income tax
Crypto Tax Type 3: Income tax
Cryptocurrency interest income, staking income, mining income, airdrops and hard forks are taxed as ordinary income.
Here's a breakdown of the most common crypto scenarios where income tax applies:
Getting paid in Bitcoin
Whether you are freelancing or working for a company that pays employees in crypto, you can't escape the Income tax.
Any coins received as Income are taxed at market value at the time you received them so make sure you declare this Income or you might end up facing the taxhammer.
Any proceeds you receive from a mining pool/service or your own mining rig are taxed as ordinary income and will need to be declared on your Income tax return.
Note that when you eventually sell the mined coins, you will still be subject to capital gains tax on the difference between the value you declared as Income and the value at the time of the sale.
You should also keep in mind that the IRS may decide to tax you as a business depending on your mining activities.
Signup & referral bonuses
Any crypto you get in return for signing up or referring users to a service is taxed as Income.
Airdrops & forks
This used to be a very confusing scenario up until 2019 when the IRS finally stated that any airdrops or forks are to be declared as Income.
Soft forks that don't result in a new coin are not taxed. Going by the IRS's guidelines even the crappy airdrops you get in your ETH wallet would be taxable income. However, these coins are usually negligible in value and can't easily be liquidated so you might be okay ignoring them (not tax advice!).
Some other points about Hard Forks that you should keep in mind:
Interest from DeFi / Lending / Staking / Masternodes
Receiving interest from DeFi is also taxed in much the same way as mining. You have to declare it on your Income tax statement as additional ordinary income.
The actual "lending" of coins is not taxed as you still own the assets and haven't disposed them yet. Note that guidance on this is not very clear, some countries such as Sweden are taxing the actual Lending transaction as a disposal. The IRS may also change its stance in the future and tax crypto lending as a disposal but - as of now - there are no indications of this happening.
Gambling with crypto
Call the casino home? Gambling is taxed as regular income in the US. Winnings are taxed at your regular income tax bracket while losses are deductible upto to a total of $3000 (remaining losses can be carried forward). Crypto gambling is no exception to the rule.
Now that you know more about the different types of taxes that may apply to your crypto activities, don't forget to get your taxes filed - the easy way with Koinly crypto tax software - by these deadlines:
Canada - 30 April
Sweden - 2 May
USA - 18 April
Australia - 31 October