As the crypto market rollercoaster continues, investors have been left grappling with not only wild price volatilities but also a critical question: How are these digital assets taxed? Whether you are an expert investor or a curious rookie, the question of the tax implications of crypto investments is too severe to ignore.
Tax implications are fundamental as watchdogs keep a keen eye and scrutinize the crypto industry. Millions of crypto investors are also actively seeking clarity on tax matters.
In this guide, I’ll dissect the implications of investing in the crypto space. I’ll do so by answering questions like:
- Why is crypto taxed?
- Who taxes crypto in various countries?
- Should you pay capital gain taxes for crypto investments?
- Why should you pay income tax for crypto?
Why Do Various Countries Tax Crypto?
It’s 2024, about 15 years after the advent of Bitcoin and the crypto industry as a whole. Now, cryptocurrency is being accepted in many regions, some as a medium of exchange and others as an investment.
In various jurisdictions, crypto activities are being overseen by various watchdogs, including the taxation ombudsman. But why? It is primarily because of their investment potential.
However, there is more.
Consider this: A recent Triple-A report indicated that as of early 2024, there were around 560 million users of crypto assets worldwide. That represents about 6.8% of the global population.
According to the report, 72% of the holders are below the age of 34. This signals a paradigm shift, with most millennials and Gen Zs looking to invest in crypto. Ignoring the vastness of crypto assets in 2024 and income potential is no longer possible.
The report also indicated that the growth of crypto ownership is speedily exceeding the growth rates associated with traditional modes of payment, with a 99% compound annual growth rate in crypto.
Aside from its fast-paced nature, crypto has also seen immense gains, with some assets surging in value 10x, 100x, and 1000x in only a few months. This is potential revenue that watchdogs cannot ignore.
Who Regulates Crypto Taxation?
Taxation rules vary by jurisdiction. However, each jurisdiction has a body responsible for collecting levies as revenue for the nation. These bodies also collect revenue in the crypto industry. Here is a short list of major nations taxing crypto:
- USA: About 40% of US adults had some investment in cryptocurrencies by 2024. The Internal Revenue Service (IRS) collects levies from crypto-related activities.
- South Africa: With about 5.8 million crypto users as of May 2024, the South African Revenue Service (SARS) collects taxes from crypto.
- Australia: Increased crypto usage in Australia necessitates revenue collection by the Australian Taxation Office (ATO).
- Singapore: Crypto is legalized and taxed by the Inland Revenue Authority of Singapore.
- Germany: About 5.8% of Germans own crypto, with the Federal Central Tax Office and local tax offices collecting taxes.
- Japan: The Japan National Tax Agency (NTA) classifies crypto assets as property, making them liable for taxation. There are also reporting requirements if you have accumulated profits exceeding ¥200,000 ($1,200).
- Canada: The Canada Revenue Agency is responsible for taxing crypto holders.
- Switzerland: With over 900 crypto-related businesses as of May 2024, the Swiss Federal Tax Administration levies crypto taxes.
- France: The DGFiP (Direction Générale des Finances Publiques) oversees taxation.
- South Korea: The National Tax Service (NTS) oversees crypto taxation.
Should You Pay Capital Gain Taxes for Crypto Investments?
Different jurisdictions have different tax types, but capital gain and income tax are the most common. Let’s begin with capital gain taxes.
Capital Gain Tax
This is the levy charged on the profits gained from selling property, investment, stock, real estate, bonds, crypto assets and businesses. You make a capital gain as long as you sell the assets for a price higher than its value at acquisition. If, for some reason, you sell assets for prices less than their value of acquisition, then the difference will be a capital loss.
Capital gain tax events only occur once the asset has been sold. If an asset gains value but is yet to be sold, the capital gain is unrealized. Hence, the capital gain taxes cannot be calculated.
How Do You Calculate Capital Gains?
To calculate capital gain tax, you need:
- The crypto asset’s value at the time of its sale (x).
- The value of the crypto asset when you purchased it (y).
Subtract the original purchase price (cost basis) from the selling price (x). If you made a profit, it’s a capital gain. If it’s a loss, it’s a capital loss.
Capital Gain/Loss = X – Y
Just as you report capital gains for taxation, capital losses are also deductible for taxation. Capital losses could reduce your tax obligation. Once you get the value of your capital gains, apply the tax rates to find the capital gain taxes, depending on where you live.
How is Capital Gain Taxed In Different Countries?
Different jurisdictions have different parameters for taxing crypto assets. Below are a few internationally accepted capital gain-taxable events:
- Selling your crypto holdings for cash: If you sell a chunk of your crypto investment for cash, a capital gain tax event is immediately triggered. If the sale led to a loss, you can deduct the loss from your tax calculations.
- Converting crypto to another: Converting your Bitcoin holding into Solana could mean you sold your Bitcoin before buying Solana. Profits from this sale are taxable. If Bitcoin is sold at a profit, capital gains are owed.
- Spending on goods and services: Using Solana to purchase a phone could mean you converted your crypto to cash and used it to pay for the phone, triggering a capital gain event.
Capital Gain Tax Rates Tables
| Country | Watchdog | Tax Rates | Exemption |
| US | Internal Revenue Services | Short term (10%-37%) Long Term (0% to 20%) | |
| South Africa | South African Revenue Services | Minimum Tax rate 18% | |
| Australia | Australian Taxation Office | Include capital gain on taxable income | Holding for over 1 year attracts 50% discount |
| Singapore | Inland Revenue Authority of Singapore | Short term capital gains (under 1 year) charged in income tax | Any gains on assets held for over a year are exempted |
| Germany | Federal Central Tax Office | Short term gains (0- 45%)Long term gains (0-25%) | |
| Japan | National Tax Authority | Short term is treated as income taxLong term attracts a 20% flat CGT rate. | |
| Canada | Canada Revenue Agency | 50% of capital gain is taxed as part of income tax | 50% of gains exempted |
| Switzerland | Swiss Federal Tax Administration | Pro traders are charged a tax on capital gains depending on their tax classification | If crypto is bought for investing purposes and not trading, you could enjoy exemptions. |
| France | Direction Générale des Finances Publiques | 30% flat rate for occasional investors 0-45% income tax rates for pro traders | |
| South Korea | National Tax Service | 20% tax rates on capital gains |
Income Tax on Crypto
Depending on the jurisdiction, crypto-related investments can also be subject to income tax levies. But what is income tax? It is a levy imposed on the incomes generated by businesses or individuals within a particular country.
Most jurisdictions require taxpayers to file annual income tax returns to help determine their actual tax obligation for the year. If cryptocurrency received falls under the category of income, then investors must add it as part of the tax filings.
So, what crypto events are taxed as income? Here are a few:
Payments Received in Crypto
If you receive your wages and salary via cryptocurrencies, the value of the assets will fall under the income tax system. Depending on the amounts, you will pay taxes in different brackets. This is the case in many jurisdictions, including the US, Singapore, Australia, Japan, UAE and others.
Businesses can also receive cryptocurrency as payment for goods sold or services offered to third parties. These payments must be reported as income for tax purposes.
Crypto Mining
Depending on jurisdiction, crypto miners could also pay levies for their activities. In the US, mining crypto as a business venture allows you to deduct the mining expenses, just like other businesses do. The profits are taxed as income.
In many other jurisdictions, including France, South Africa, Australia, Japan, Canada and Singapore, the profits accumulated from mining cryptocurrencies are considered taxable income.
Earning Staking Rewards
Staking, like mining, is also considered an income-generating activity for revenue-collection purposes. These levies imposed by governments are usually based on the fair value of the rewards you receive on the day they are given to you.
What About Crypto Gifts and Inheritance?
In many jurisdictions, including the US, France, South Korea, and Japan, gift giving and receiving is not considered a taxable event. However, if the receiver disposes of the gift in the future, relevant taxes, including capital gains, could be imposed.
The US also stipulates that gift amounts exceeding $17K a year must be reported in the gift tax return (IRS Form 709).
Like gifts, crypto inheritance is not subject to taxation in many jurisdictions, including South Korea and the US. However, a capital gain tax could be triggered at the time of disposal.
What Are Tax-Free Crypto Activities?
This guide has focused chiefly on crypto activities that demand payment of taxes. However, many more crypto activities do not require tax obligations. Among them include:
- Buying crypto assets – Purchasing crypto assets is not taxable in many jurisdictions.
- Minting, swapping or purchasing NFTs is also considered tax-free in most jurisdictions.
What About Forks and Airdrops?
Airdrops and hardforks are crypto-related events that involve the issuance of a new cryptocurrency. Hard Forks occur when a blockchain network splits into two, creating a new crypto that is often distributed to network participants. Airdrops are free tokens distributed to crypto holders.
In both cases, the free tokens are treated as income for taxation and should be reported in the tax filings.
Can You Write Off Crypto Losses?
Yes, you can! Here are a few losses you can use to offset your tax liabilities:
- Depreciated Investments: If you invest in a crypto like Bitcoin and its value depreciates when you sell, you can use the loss to offset your tax liability.
- Worthless Tokens: If you purchased a token that did not perform as expected, you can sell it and report any losses to offset your tax liability.
What’s Challenging About Crypto Taxation?
In your journey to deal with crypto taxes, you might face several challenges. Here are a few significant ones:
- Keeping Records: Keeping detailed records of every crypto transaction can be daunting.
- Calculating Taxes: Calculating crypto taxes is complex and often requires financial experts and certified accountants.
- Tax Law Variations: Different jurisdictions have varying tax laws, adding to the complexity.
- Tax Software Limitations: While tax software can help with calculations, it may not always be comprehensive.
Final Word
In this guide, I dug deeply into the subject of crypto taxation, highlighting the few things investors must know to be on the safe side. In many jurisdictions, there are strict requirements to pay capital gain and income tax depending on the crypto activity conducted.
Crypto taxation is a complicated endeavor, with multiple taxes imposed on crypto assets. As such, you must be extra careful when reporting your income. Even better, you should consult accounting experts to guide you accordingly and help you stay on the right side of the law.