If you bought, sold, traded, or used cryptocurrencies this year, chances are that you owe tax on those transactions. Crypto and taxes can oftentimes feel like murky waters, so we’ve put together this comprehensive guide to crypto taxes to help you better understand when and what you owe.
Please note that we’ve put together this guide to inform you and assist you in your research, however, this is not professional advice and a tax professional should be consulted.
Here is a brief overview of the topics covered:
- Crypto Taxation Around The World
- Understanding What Is Considered A Taxable Activity
- How To Calculate Crypto Gains And Losses
- Crypto Tax Terminology
Our aim at Oobit is to provide a platform that makes using cryptocurrencies as simple as using fiat. While the crypto industry is a new and decentralized take on the financial system as we know it, it still needs to be used alongside the traditional one, and that means complying with tax regulations.
Crypto Taxation Around The World
Each country has their own regulations on what tax a user needs to pay, which we’ll cover briefly in this guide. It is on the individual to research, report and comply with the tax regulations in their particular jurisdiction. In this guide to crypto taxes, we will cover the United States, Germany, United Kingdom, Japan and Israel.
Some countries charge no tax on the personal use of cryptocurrencies, some of which include Malaysia, Belarus, Portugal, and several others. Check to see the tax laws for crypto in your country.
In the U.S., the IRS views crypto as property, implementing capital gains tax on any profits or losses made. They treat cryptocurrencies as property as opposed to currency, meaning that users need to report any gains or losses and pay the complying tax.
The European country has a unique approach to taxing cryptocurrencies. Profits from trading cryptocurrency are subject to 25% capital gains tax if the profits were made within the first 365 days from the initial purchase of said cryptocurrencies. If the profits are made after the first year, they are not taxed.
Meanwhile, in the U.K., Her Majesty's Revenue and Customs (HMRC) regards crypto as foreign currency. This means that tax payable is subject to gains and losses made, with a few loopholes. It is best to seek the advice of a tax professional, one that specializes in crypto, to see whether you fall into their “speculative transaction” category.
Ahead of their peers, Japan’s National Tax Agency views Bitcoin as a payment method. It is no longer subjected to consumption tax (as of 2017) but rather considered “asset-like values”, with trading profits subject to business income tax regulations.
The Israel Tax Authority views crypto as an asset, subjecting any profits or gains made from selling it to 25% capital gains tax.
Understanding What Is Considered A Taxable Activity
Here are the main crypto activities that are subject to tax, again these might change from country to country so it is best to check in with local authorities. Users must pay tax in 2021 if they have:
- Traded crypto for crypto, i.e. sold Bitcoin and bought Ethereum.
- Sold crypto for fiat, i.e. sold Bitcoin for USD.
- Paid for goods and services with crypto, i.e. bought plane tickets with Bitcoin.
- Collected crypto for mining or staking activities, i.e. mined and earned ETH.
- Collected crypto as a result of a fork, i.e. earned BCH when it hard forked off of Bitcoin.
All transactions should be recorded based on the crypto price at that time. You can access all your transactions from the Oobit dashboard, under Recent Activity.
Airdrops and Tax
Airdrops are marketing tools often used to promote a new cryptocurrency. Airdrops involve the company giving away free crypto, sent directly to a user’s wallet address. The general rule with crypto received through airdrops is that it is not subject to tax until you do something with it, like sell, send or use. If the funds are just sitting there, they are exempt from tax. Always check with your local tax authorities.
It is also worth noting that the following activities are generally considered to be exempt from tax payments:
- If you bought crypto with fiat, i.e. bought BTC with USD.
- If you HODL (hold crypto long term and don’t use it for anything).
- If you made a crypto donation to a tax-exempt charity or organization.
- If you sent crypto to another user as a gift (check your jurisdiction's gift tax).
- If you sent crypto to another personal wallet of yours, i.e. from your Oobit wallet to a personal wallet or visa versa.
How To Calculate Crypto Gains And Losses
Tax on crypto is established by considering the price you bought it at and the price it was valued at at the time of sale.
For instance, if you bought 1 BTC on 11 March at $3,949.78, and sold 1 BTC on 26 November at $18,664.41, you would have made $14,714.63. If this is liable to 25% capital gains tax, you would be liable to pay $3,678.65 in taxes. This is merely an example to illustrate a point, please consult your tax advisor.
Note that losses may be deductible under capital gains laws. These can be deducted from your entire tax bill should they be incurred (fiat and crypto tax bill).
Paying taxes on crypto can be complicated, please ensure that you find a reliable advisor in your country who can advise you accurately. This guide to crypto taxes is just that, a guide.
Your tax advisor will be able to provide you with the necessary forms needed to declare your crypto tax earnings (or losses) and advise you on going about filing them. They will also be able to help you through any hurdles or questions that might arise.
Crypto Tax Terminology
Navigating the crypto tax field can be complex, so we’ve put together a few terms you might come across to help you along the way.
This refers to any asset that you own, from stocks to a home to digital assets.
Cost basis refers to the initial amount that you paid for the cryptocurrency when you bought it.
Cost Basis Methods
This refers to how to establish which cost basis to refer to, i.e. if you bought crypto several times during the year and then sold at various times, which cost basis do you use. It is best to consult your tax advisor, however here are some options.
First In, First Out (FIFO)
This method considers the first crypto you sold to be the first crypto you bought. The gains or losses are established by looking at the price at the time of the oldest crypto in your portfolio, compared to the first sale.
Last In, First Out (LIFO)
As you can imagine, LIFO looks at the last assets purchased to be the first assets sold.
Specific Identification (SpecID)
SpecID is the method of specifically identifying each crypto transaction (when it was bought and when it was sold). This method is more time consuming and requires a lot more effort.
Your tax adviser will assist in determining which method is best for your individual case.
Fair Market Value
This refers to the price that a particular cryptocurrency cost at the time of transaction.
This refers to the profits you made off any trades, and can only be established once you sell or exchange the crypto. If they remain in your portfolio that are not taxable.
Long Term vs Short Term Gains
Long term gains are often subject to more favourable tax rates so it’s best to establish where your gains fall. Short term gains refer to any gains made from selling the assets within the year of purchasing the cryptocurrency, while long term refers to any gains made from selling the assets after a year of holding.
Losses refer to a loss of value from the initial purchase price and the selling price. If you make losses on your trades and crypto is taxed under capital gains tax, you can offset these losses against your gains.
Crypto Tax 101
As we’ve mentioned before, several times, it is best to consult a tax advisor who is clued up on the crypto tax regulations in your area. The onus is on the individual to comply with tax laws, and failure to do so is punishable with fines and jail time. We hope this comprehensive guide on crypto taxes for 2021 helped to shed light on the complex matter and cleared up a few questions.