Paying crypto taxes is becoming increasingly difficult in 2020, as government tax authorities around the world continue to change their minds on how digital assets should be handled. To make things easier, we’ve put together a comprehensive guide to bring you up to speed on the latest changes.
Crypto-assets have entered the mainstream in the past few years, attracting the attention of tax authorities in leading economies. Following a boom in trading and prices, the gains made from crypto-related deals and activities are starting to be counted toward taxable income. Especially in the developed countries, tax authorities have tools to track unreported income.
Cryptocurrency taxation accelerated after 2014, when Bitcoin and a handful of assets arrived on stage. With the arrival of significant gains in 2017, most tax authorities prepared to reinvent their rules and attempt stricter regulations on potentially hidden income.
Having a general idea of when taxable events occur make it possible for crypto investors to make informed decisions, and avoid working in breach of local laws.
Overall, the past 12 months saw shifts in regulations related to cryptocurrency. Tax regulators started not only passively reminding investors to pay any due taxes, but also issued specific guidelines and warnings on reporting income. It is possible that the IRS can also track transactions for some networks. The latest status of tax requirements and the level of interest that tax authorities pay to crypto assets varies by country and region, with the tax rates ranging from zero to as high as 55%. For now, the IRS 60X rule for futures and options trading refers only to forex options and futures, where 60% of gains or losses are accounted as long-term capital gain, and 40% are treated as short-term capital gains.
The Legal Status of Digital Currencies, Tokens, or Coins
The general consensus is that digital currencies of any form or based on any technology represent a type of ownership. The nature of the asset is relative as some types of tokens are considered securities.
Worldwide, regulations differ, but so far, no country has admitted any digital asset as “money”, “currency” or legal tender. Crypto assets are usually categorized as commodities, or a form of property.
So far, merely holding digital assets in a wallet is not a reportable event for most tax jurisdictions. But the most important concept is that of capital gains, or gains and losses realized upon the sale of a digital coin or token. Because cryptocurrency prices are extremely variable, it is highly possible that not all coins are sold for a gain.
Taxing and legalizing BTC and crypto trading is a complex issue, with each nation having its own set of rules. A handy list compiled by Reuters may be the starting point for exploring one’s specific tax situation and events that need to be reported.
Capital Gains from Crypto Sales
A capital gain is a rise in the value of any asset held, whether stocks, real estate, or in this case, ownership of digital assets. A capital gain is only realized when the asset is sold.
It’s important to differentiate between a short-term capital gain, where the asset is held for less than a year. Longer-term holding means the sale will be taxed at the usually more favorable rate for long-term capital gains.
Because of the turbulent nature of cryptocurrency trading, short-term capital gains reporting may be more involved, requiring a log of all trading activity, as well as gains or losses realized.
The rule of short-term, or long-term gains may be applied depending on jurisdiction, and some taxation forms do not allow for such a differentiation.
The other important concept on trading crypto assets may be the actualization of a taxable event. For some jurisdictions, this may be as simple as selling the underlying asset.
But for US nationals, a taxable event may arise in other situations. Those may include:
- Using cryptocurrency for buying and selling;
- Exchanges between crypto assets;
- Coins or tokens allocated in an airdrop;
- Coins and tokens allocated after a hard fork;
- Receiving a payment in the form of crypto assets.
US taxation rules are not entirely clear on taxing hard forks or tokens received for essentially zero-value. There is no consensus on what is the fair value of an airdrop, but it must be kept in mind it is possible some assets may be counted as a taxable event.
In the past few years, the growth of the sheer number of cryptocurrency assets, in the form of new coins and tokens, makes it impossible to track all assets received. However, some exchanges and other cryptocurrency-related operators may have the duty to report cryptocurrency sales and withdrawals.
Case: US-Based Forms
US-based exchanges have been asked to produce 1099-K form, which only counts the transaction coming out of the exchange. This means the trader may have sold at a loss, but the end withdrawal may be counted as a gain.
To avoid the confusion, US citizens may have to fill out form 8849, which allows for more detailed tracking of asset acquisition and disposal.
But this case reveals a more proactive approach, as the IRS started to send out letters reminding traders to pay taxes on their crypto gains. But after more detailed discussions, the IRS has allowed for detailed reporting to describe all exchanges and trades that are relevant to the tax base.
At the moment, most blockchains, starting with Bitcoin, are pseudonymous. In theory, it is possible to track ownership, but only if there is voluntary reporting. For tax purposes, authorities count the receipt of assets as a confirmed transaction, and the moment the assets come under control.
In 2020, total surveillance of digital asset ownership is not feasible, and the IRS is still not tracking all potential owners. However, in the case of some tokens or specific blockchains, the ownership may be tied at least to a personalized account. In rare cases the issuers of tokens even perform KYC, tying ownership to a real-world identity.
But there is no proactive approach to track crypto ownership, and until the assets are sold through an exchange, or in another manner that is traceable, only voluntary reporting remains to inform the taxman.
And while the consensus sees crypto gains as taxable, at this point it is still possible for multiple transactions or trades to remain outside the scope of tax authorities. But those conditions may change in the future, exposing anyone that may have tried to disguise crypto ownership or gains.
Hard Forks and Capital Gains
The issue of hard forks has been highly contentious for cryptocurrency owners. Buying Bitcoin was simple enough. But in the past two years alone, Bitcoin forked into several assets, thus potentially giving all owners the claim to the same amount of coins on other networks.
Starting with Bitcoin Cash, there have been more than a dozen forks. And while some of those assets traded at very low prices, the IRS issued requirements in late 2019, which ambiguously claimed a taxable event upon the receipt of a hard fork.
But the IRS has not clarified what it means to receive coins in a hard fork. Taking control of those coins is not automatic, and requires a process known as “coin splitting.” Coin splitting requires that an exchange credits the user accounts with the forked coins. The other approach is to move coins to a new wallet, where the balance may be recovered from the new network. Not all owners of BTC choose to gain access and control to all forked coins.
This has led to a letter requiring the US IRS to specify what it means by receiving coins in a hard fork, and to avoid taxation that may lead to a high tax bill for a now-worthless asset.
Case: Bitcoin Gold
Bitcoin Gold was a hard fork from late 2017, which produced an asset initially trading above $500. If the initial IRS guidelines are to be counted, all BTC owners at the time of the hard fork, if they are US citizens, would owe tax on the new asset.
But the price basis for Bitcoin Gold is a price that has nothing to do with current market prices. The time of claiming the coins, if that is counted, may be very different from the price when Bitcoin Gold initially traded. BTG subsequently fell to a price as low as $5, and recovered to around $12 in early 2020.
Establishing the taxable event for this relatively small fork, as well as other similar attempts at re-creating Bitcoin, is still under discussion.
As of December 20, 2019, the IRS is still reviewing a letter from Congress, requiring a revision of the guidelines, and demanding that the latest tax rules are not treated as established law. Instead, the group of Congressmen takes into account the fact that cryptocurrencies are still a new technology, which cannot be captured in the rules of 1099 forms.
It is possible that reporting may vary in its detail and intentions, and the IRS cannot foresee and establish each taxable event arising from various digital coins or tokens. Hence, the best approach may be to look at trading history, but also to keep in mind the final gains, as well as funds that entered bank accounts or were received in another manner.
How the IRS Defines Crypto Value
The idea that cryptocurrencies and other virtual assets represent value, and are hence taxable, stems from the way the IRS codifies those assets as representing value in recognized national currencies, including the US dollar.
“Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin, Ether, Roblox, and V-bucks are a few examples of a convertible virtual currency. Virtual currencies can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies,” the IRS stipulates.
“The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability,” warns the IRS.
From those propositions stem most cases where each individual owner or trader may have to figure out the exact approach to report income, based on specific gains or losses.
The IRS has a set of guidelines, ranging from general to specific, and has asked for reporting since 2014. But the new tax season has more details on reporting, this time expanding the scope of taxable events. The rules of 2019 are what is considered the most recent and relevant basis for reporting for tax season 2020.
Letters of Warning
In 2019, the IRS signalled its strong stance on crypto trading by sending 10,000 letters of warning. The letters were of two types – a warning and educational letter, and a more serious one demanding a reply and actions to file the correct tax returns.
The sending of 10,000 letters suggests IRS may be tracking accounts related to exchanges, most probably Coinbase. The accounts mentioned in the letter do not relate to wallets or other forms of ownership, such as having balances on the blockchain.
To file the correct tax return, if required, may be done through form 1040. The warnings and requirements affect persons that have shown activity related to cryptocurrency trading, while failing to mention their ownership and trading operations.
Sources of Balance Information
Building up the base to calculate taxes may be complicated. Information on balances may be acquired from exchange logs.
For now, the IRS has not issued specific requirements for futures or derivatives trading. Futures trading and margin cryptocurrency 100X leverage are also not unusual, and may generate specific income streams. In 2020, there are no specific guidelines on how to tax 200X leverage, or even higher margin calls. But it is possible to claim a loss on trades.
Reporting on Bitcoin transactions may also happen using various techniques, including FIFO and LIFO. But in the case of Bitcoin, any specific time of purchase may arrive with different price ranges. This means that a detailed list of transactions may specify exactly which coin was sold, and what is the difference between the purchase price and the sale price.
For instance, selling a coin acquired at $8,000 is not the same as one acquired when BTC was $1 or even $30. Hence, there is no requirement to sell earliest coins first, and reporting may focus on an asset purchased at a specific price.
This possibility means selling Bitcoin can form a base that can also lead to temporary capital loss, if the reporting person chooses to minimize taxes for a certain time period.
Transaction information from wallets is also not revealing all taxable events. Moving coins between owned wallets or addresses is not considered a taxable event. So far, the IRS has not issued guidelines on reporting transactions or revealing the intention behind transactions, or giving any other evidence of private key ownership.
Crypto-to-Crypto Exchanges and Stablecoins
Perhaps the most confusing moment of cryptocurrency trading is the need to report a switch between crypto assets, as well as any capital gains stemming from those operations.
The IRS has a concept of Like-Kind exchange, which does not generate a taxable event when moving between some types of assets. However, this does not apply to cryptocurrency exchanges, which are not registered for Like-Kind swaps. For US citizens, as of 2020, those types of exchanges are only limited to real estate.
This also means cryptocurrency exchanges in the US are not registered to support Like-Kind exchanges, and fulfill the requirements to file form 8824. This also means that switching between Bitcoin and altcoins is capable of generating a taxable event.
For instance, buying BTC at $6,000, and exchanging it for Ethereum when BTC has already climbed to $9,000 generates the same capital gain of $3,000.
However, this gain can be offset by a loss as well. In case the altcoin drops in value, the sale itself generates a loss that may offset the capital gains, in the end leading to a lower tax bill. However, both operations need to be accounted for, until the last liquidation into fiat.
Stablecoins and Taxes
In 2020, most cryptocurrency trades use one of several coins pegged to the value of the US dollar. Those assets have varied states of legal acceptance, but are widely used worldwide. The most common one, Tether, or USDT, is capable of storing the value of assets sold.
In the above example, BTC appreciated from $6,000 to $9,000. However, the asset was exchanged for USDT, meaning the funds are still not switched to fiat. Still, the capital gains may generate a taxable event, which means stablecoins are not suitable tools to disguise capital gains.
For US citizens, coins like Paxos, TUSD, or USDC also require complete screening with real-world identity evaluation. For now, exchanges do not report trades that transform gains into stablecoins. However, stablecoin issuers are a potential source of disclosure. Having a Coinbase account, as already discussed, means the IRS may be aware of cryptocurrency activity, while discounting the usage of stablecoins.
However, the best approach is to consult an expert on the issue of transactions between cryptocurrencies. The best approach is to have a complete log of activities, to achieve an easier calculation of the tax basis.
Crypto Taxation in Canada
The Canada Revenue Agency works with a set of guidelines from 2014, advising on the correct filing. Canada supported highly active cryptocurrency activity, and the tax authorities had the tools to track and require payments, similar to the US system.
Canada treats cryptocurrencies as commodities for the purposes of taxation. Depending on sources, income tax or capital gains tax is applicable. Canada differentiates between sporadic and regular income, and treats regular activities as sources of business income.
As for fair value, the requirement is to estimate and self-report based on general guidelines.
“To figure out the value of a cryptocurrency transaction where a direct value cannot be determined, you must use a reasonable method. Keep records to show how you figured out the value. Generally, the CRA’s position is that the fair market value is the highest price, expressed in dollars that a willing buyer and a willing seller who are both knowledgeable, informed and prudent, and who are acting independently of each other, would agree to in an open and unrestricted market,” the Canadian tax authority explained.
Crypto-to-crypto exchanges are also causing a taxable event in Canada, similar to the US-based system. Similarly, reporting for Canadian citizens or businesses requires the preservation of most records, including wallet entries, exchange withdrawals and any other relevant data on transfers and acquired coins and tokens.
Tax Situation in the EU
The European Union is one of the more relaxed regions for cryptocurrency trading. However, most countries are aware of the gains potentially made in cryptocurrency trading.
The tax rules within the EU are highly varied, as the overall rules allow trading, while leaving it to countries to figure out the tax accounts of citizens or corporations. For that reason, it is difficult to offer general guidelines on EU-based taxation. The exact rules vary based on local tax rates and types of taxes.
There is also a disparity in the way each country views digital coins and tokens. Germany, for instance, sees Bitcoin as money, however, not official money, but a form of “private money”. Switzerland, one of the most lax regulators, accounts for cryptocurrency in the way forex markets are codified when it comes to taxation.
For most EU countries, owning digital assets does not need to be declared. Switzerland is an exception, where the Swiss franc value of those assets must be declared in advance at the start of the tax year.
However, there is a big exception for speculative trading – not all operations need to be taxed as they happen. This is a big advantage and a relief to EU citizens, where only the initial and final value of assets may be reported.
Usually, traders will make a series of deals, and it is rare to see straightforward buying and selling of Bitcoin or other assets. The EU rules may be solved on a case-by-case basis. However, it must be noted EU bank accounts can be traced, and transfers above 5,000 EUR are often scrutinized.
EU-Based Exchanges and Brokerages
EU-based exchanges and brokerages are usually completely transparent. They are connected to the EU-wide banking system, and offer relatively high limits for trading and withdrawals.
However, EU-based exchanges are not obliged to report on taxes and tax events, especially given the decentralized nature of the union, with many different jurisdictions. Thus, all EU citizens must report their gains or losses as physical persons, to pay the taxes owed.
The EU taxation rules also apply to Malta, Liechtenstein, Switzerland and other territories that have harmonized their financial legislation. The potentially applicable taxes are, in most cases, physical person income tax; some forms of local taxes; wealth tax when it applies, and possibly corporate tax in case the cryptocurrency activity is related to a business entity.
EU and VAT on Crypto Deals
Cryptocurrency trading in the EU is treated in a way similar to forex trades. This means the trades do not incur VAT. Merchant usage of cryptocurrencies is also freely available, and for now may be a tool to circumvent VAT payments.
Taxing Miners in the EU
Cryptocurrency mining is differentiated from speculative activities. Namely, the gains from this activity can be counted as the results of business activity. Thus, the sale price of coins can be offset by business expenses, including the hardware and electricity costs incurred in the process. This approach may require the services of an accountant, which may end up in a lower tax bill.
The EU has not issued any specific requirements on income from hard forks or airdrops. For now, capital gains where they apply may be calculated for any coins received and possibly sold for fiat.
UK Crypto Taxation
The UK has had most of its financial rules harmonized with the EU. However, with Brexit looming as of January 31, 2020, and with a 10-month process of establishing a new relationship with the EU, the UK may have a different set of taxation rules before long.
The overall stance of the UK is that cryptocurrency is either an asset/property, or private money. Tax reporting also hinges on the principle of capital gains tax. Sales tax, a form of VAT, does not apply to cryptocurrency deals.
Unlike the US, where the IRS has attempted to create a system of terms, the UK tax service HMRC has taken a case-by-case stance. This means that each transfer or sale may be regarded as a novel situation, looking into where the exchange of value really happened.
The HMRC has admitted that cryptocurrency is a new sector, and with the advent of tokens, it has created multiple tax situations that are too complex for a single framework.
UK Tax Terms
The tax authority has still established some general terms for digital assets. Usually, those
Assets utilize a Distributed Ledger, although a distributed ledger does not necessarily use a token or coin. Those assets can be stored, transferred, or exchanged.
The HMRC recognizes three types of assets: exchange tokens, utility tokens, and security tokens. Bitcoin, for instance, is considered an exchange token.
Taxation happens based on the de facto events regarding value transfers and capital gains, and not on the definition of the token. Thus, selling Bitcoin or a security token incurs the same capital gains tax.
The general stance of UK tax authorities is that in the majority of cases, individuals hold onto the tokens as a form of alternative personal investment.
“In the vast majority of cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation in its value or to make particular purchases. They will be liable to pay Capital Gains Tax when they dispose of their cryptoassets,” the tax guidelines state.
But because the tax authority looks at different cases, using cryptocurrency as an alternative form of payments may incur not only capital gains tax, but also personal income tax and insurance.
UK Definition of Crypto Trader
UK tax authorities also differentiate between sporadic cryptocurrency deals, and what may be considered “trading” activity. High frequency and volume of activity may constitute financial trading activity, and incur a different type of taxation; once again income tax instead of capital gains tax.
“As with any activity, the question whether cryptoasset activities amount to trading depends on a number of factors and the individual circumstances. Whether an individual is engaged in a financial trade through the activity of buying and selling cryptoassets will ultimately be a question of fact. It’s often the case that individuals and companies entering into transactions consisting of buying and selling cryptoassets will describe them as ‘trades’. However, the use of the term ‘trade’ in this context is not sufficient to be regarded as a financial trade for tax purposes,” the tax authority explains.
Thus, in the UK, it is important to differentiate between sporadic activity, and what may be considered business-like activity or regular trading.
In the case of highly active and regular cryptocurrency-related activities, business income reporting may be necessary, falling under a different set of rules.
Airdrops Not Considered Until Liquidation
The term disposal means the final act of liquidating digital assets. Like all crypto cases, the UK authorities look at the specifics and whether the airdrops have the nature of assets with potential returns. Generic, goodwill airdrops not related to any purchase or investment, incur capital gains only upon their sale.
More specific airdrops which may present dividends or other types of returns present specific challenges, depending on whether the assets were liquidated or if their value presented potential capital gains.
Airdrops were a fad in 2017 and 2018, when projects would award tokens for free, as a tool to expand their communities. Those types of generic airdrops can usually be accounted as a capital loss.
UK tax reporting has specific rules when accounting for multiple token sales with gains or losses. There is a 30-day waiting rule when acquiring new assets, before they can be pooled when accounting for capital gains or losses. Newly acquired assets that are traded within 30 days of acquisition must be counted separately.
Older assets may be used to calculate the cost of sale and the tax basis.
For instance, if Alice bought 10 BTC for $1,000, and then bought 10 BTC for $1000,000, she would have a total allowable pooled cost of $101,000. Selling 5 BTC for $40,000 could be discounted with the cost of 5 BTC from the pooled cost, or $25,250. Alice’s total tax gain would be $14,750, on which tax would be due.
However, if Alice bought one BTC at $7,000 and sold it days later at $8,000, it would be accounted separately and not pooled with previous purchases for a cost basis.
This rule makes the timing of purchases and a detailed log extremely important. Claiming a different cost basis may make a big difference in counting gains or losses. With turbulent crypto prices, this may also make the final tax bill look different. In any case, just like US-based traders or owners, UK tax reporting requires keeping score of all transactions, and being ready to make the case for one’s specific intentions and levels of cryptocurrency activity.
Pooling and Hard Forks
The HMRC will consider hard forks on a case-by-case basis. This means that if a Bitcoin owner did not decide to split coins, or receive coins from an exchange, tax authorities may be understanding and not require reporting.
For instance, a snapshot of the Bitcoin blockchain, which reportedly allowed access to HEX tokens, need not be reported if a user does not intend to take the HEX tokens, or trade them.
But if a fork-based asset is acquired, its fair value and cost are not pooled with other tokens, and a sale can be calculated just for that asset.
Rekt: Reporting Asset Prices Going to Zero
UK-based traders may claim they “disposed” of an asset, where the value has gone to zero. Even without a sale, following general capital gains rules, an asset can be pronounced to have “negligible value”. The zero-based value can then be used in conjunction with the cost basis of pooled assets, to claim capital losses.
This rule is especially valuable to altcoins, where indeed losses and crashes to zero have been possible, despite previous spikes to extraordinary valuations.
Lost Private Keys
Based on the above rule, loss of private keys may be used on a case-by-case basis to avoid paying capital gains. In case of a loss, the user claims negligible value minus the re-acquisition value of the assets, to crystallize a loss. However, the loss must be accepted by the HMRC, to avoid fraudulent claims. The tax authorities do not track blockchains, and claiming to have owned and lost private keys must be supported by evidence.
However, the HMRC does not have provisions for theft or loss of digital assets, except for the potential to claim negligible value.
As seen above, the UK guidelines are extremely detailed and also flexible, to reflect the shifting nature of the cryptocurrency space. The above cases may be made for other jurisdictions, and reveal examples in which tax authorities do not have a proactive outreach, but may be amenable to reporting or negotiations.
The latest UK regulation on cryptocurrency dates back from 2018, and there may be changes once Brexit becomes a reality.
Southeast Asia, Japan and China: Specifics in Crypto Taxation
Southeast Asia is one of the hottest regions for cryptocurrency activity. For that reason, in the past few years, tax authorities have also reawakened to the reality of relatively high potential gains from trading.
Japan considers Bitcoin as a legal method of payments. Its approach is to levy capital gains tax on sales made for profit or loss. Cryptocurrency payment is highly developed in Japan, but payments are exempt from consumption tax.
Japanese taxation is relatively high, ranging between 15 and 55%, with mandatory reporting required on gains made based on crypto assets. The taxation depends on tax brackets, and is higher in comparison to gains from international stocks. Japan has allowed exchanges to link directly to banks, and trading is not anonymous, hence traceable by the National Tax Authority.
China, for now, is still the Wild East when it comes to crypto. All coins and tokens are considered a “virtual commodity”. Ownership, trading, and disposal of cryptocurrencies are still a legal gray area.
As of 2020, China has still not levied tax on digital asset gains, despite the highly active trading activities. Exchanges may report in the form of corporate taxes, but for individuals, there is no tracking or compulsory reporting.
The reason for this may be the fact that China tried hard to separate the world of banking and fiat from trading cryptocurrencies. Back in 2017, most exchanges stopped offering pairs with the Chinese yuan, and switched to trading between coins only, with the aid of stablecoins. Legal observations have not noted any specific rules regarding cryptocurrency reporting, except for monitoring and auditing general wealth.
Since the fall of 2017, it has been near-impossible to trade in fiat. Hence, Chinese traders moved their activity entirely on the blockchain, and into USDT tokens. China is thus unable to track bank accounts, or link exchange accounts to real persons. Its aim to deprive the crypto sector of a fiat gateway is also hampering the potential to collect taxes.
The chief reason for China’s stance is to impress its rules on capital controls. However, the potential to move cryptocurrency internationally has somewhat managed to circumvent those controls, at least partially.
Crypto regulations constantly fluctuate in Southeast Asian countries. It is possible some countries levy taxes where there were none before.
Currently, Singapore levies no tax on crypto transactions. However, the country is very strict about money laundering, and has capital controls to avoid funds flowing out of the country. Selling cryptocurrency in Singapore may in the end require foreign citizens to report the sale to their respective countries’ tax authorities, or face a penalty and even imprisonment.
Thailand’s model is relatively simple, levying a 15% capital gains tax, while allowing a waiver of the 7% VAT in the country.
Hong Kong is also offering tax-free Bitcoin sales, and does not require specific reporting on trades. However, income in cryptocurrency for merchants may have to be reported in Hong Kong dollar value.
Foreign nationals, however, are mostly blocked by significant difficulties in liquidating assets in those regions. Attempting to avoid taxes may be a complex affair for foreign nationals, and lead to potential penalties.
Cryptocurrency laws in Asia are also constantly reinvented, mostly focusing on fraud, consumer finance risks, as well as money laundering. For now, the regions have more lenient policies on taxation.
Russia: Still Struggling to Tax Crypto Assets
Russia is yet another region where cryptocurrency activity is extremely high. Yet the country is still not ready with regulations, and trading is a big gray area. For now, cryptocurrency activity flies under the radar of tax authorities.
But the Russian Duma may be working on new legislation, potentially tracking cryptocurrency activity and finally taxing individuals. For now, Russia still allows low-verification trading on some exchanges, which remain high-risk. Banks have offered to track transactions coming from cryptocurrency sales, but for now, Russian traders and sellers may fly under the tax radar.
So, Can Crypto Avoid Some Taxes?
In 2020, it looks like most of the Western countries and some markets in Asia are on track with taxing cryptocurrency gains. The IRS has taken the most proactive approach by linking identities to Coinbase accounts. But there are still offshore regions where cryptocurrency sales may be tax-exempt.
There is a caveat though- for most jurisdictions, the location of assets is considered the country of citizenship. This means even if a token is held on an offshore exchange, its location can still be considered the UK or the US for tax purposes.
Still, there are regions where a tax-free sale could be achieved, alongside other techniques for offshore businesses.
Slovenia, part of the EU, has all the benefits of a fully legalized market, plus zero capital gains tax on cryptocurrency sales. However, income in cryptocurrency is taxed with personal income tax. But overall, speculative trading may be possible for local residents without capital gains tax.
Belarus, while not in the EU, is one of the regions where crypto taxation is a gray area. The country, despite political risks, is still a haven of crypto activity, for those willing to get exposure to its regime and economy.
Offshore zones already mentioned include Singapore and Hong Kong, as well as possibly China’s Hainan special economic zone. But similar possibilities exist for Barbados, Malaysia, and Mauritius. Other offshore zones with special cryptocurrency rules include Puerto Rico, the hurricane-stricken country which attracted Bitcoiners.
But perhaps the biggest advantage is that cryptocurrency trades are VAT-exempt, limiting the liability when switching to fiat.
Tools to Calculate Crypto Taxes
The tax base could be calculated using logs from wallets or exchanges. But there are tools that make the tracking of transactions easier, as well as the balances required to calculate the tax base.
Tools like Koinly consolidate exchange information, wallet transactions, and include the potential for professional advice to achieve the minimal potential tax payment. Koinly works with multiple major tax authorities, for detailed reports with complete compliance.
The eToro brokerage and trading platform also includes tax calculation for UK citizens. It is also possible to use generic free tools for easier calculation. Crypto tax calculators usually support information directly from exchanges to complete the reports.
Taxing Mining Income
Mining income is, in most cases, treated as regular business income, with rules applying to the specific jurisdiction. The biggest advantage of miners is they may claim the expenses of hardware and electricity to decrease the tax basis. In the past, mining has been an amateur activity. But since 2016, cryptocurrency mining 50x increases in activity were not unusual, for Bitcoin and other assets.
Depending on the coin mined, the value of this activity may be extremely low, as in the case of amateur mining. But Bitcoin mining may be used as a tool to decrease the tax basis for most miners. With multiple operations situated in China, it is possible some miners fly under the radar.
Best Approach to Crypto Taxation
The best approach to cryptocurrency taxation is to err on the side of reporting. Regulations shift all the time, and depending on the potential for surveillance on bank accounts, tax authorities may be more aggressive in seeking out earnings originating from cryptocurrency exchanges. Simply having a big unexplained balance may alert tax authorities.
The rules of residence may vary, as some regions may have more lenient taxation.
The other requirement is to keep detailed records of all activities, either using specialized tools or tracking and copying each transaction or operation to calculate the most favorable tax base based on regional rules.
For now, there is no need to report or reveal addresses or wallets, or declare a connection between a name and an address. But in the future, blockchain tracking may become a big part of taxation rules. Currently, only a few startups are working on tracking the blockchain, identifying “whales” and significant moves. But in the future, assets themselves may not be fungible and anonymous, leading to a stricter potential for taxation.
With season 2020 in full swing for reporting, the world of cryptocurrency also faced stricter regulations in the EU, as well as the USA, coming into force in the new year. Increased surveillance also looks like a positive fact, in that cryptocurrency has been accepted among investment methods, and taxing is a way to legitimize that activity.
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