Article written in cooperation and with guidance from Legal Tax Expert Francesco Carelli
As cryptocurrencies slowly enter the ‘mainstream’, tax authorities worldwide are looking to join the ‘party’. In theory, cryptocurrency trading is taxed in the same way as FX trading of fiat currencies: in the familiar form of income tax or corporate gains tax. However, since the tax devil often lies hidden in the details, how are cryptocurrencies actually taxed and, most importantly, by whom?
Different countries take different positions on handling cryptocurrency for tax purposes. Generally, most jurisdictions have so far no specific tax laws on cryptocurrency taxation. The treatment of taxes is ruled by guidance documents issued by relevant tax authorities.
In this article we will be looking at the cryptocurrency tax situation in the United States, UK, France, Brazil and Australia
Crypto Taxation in the United States
As of 9 October 2019 the United State’s Internal Revenue Service (“IRS”) provides an official guidance on crypto taxation which states that all cryptocurrencies, including Bitcoin, Etherium, Litecoin, XRP etc. should be treated as property for tax purposes, as opposed to currency. This means that property such as stocks, real-estate and gold is treated equivalently to crypto. When you trade stocks, you are expected to report your capital gains and losses, and the same applies to cryptocurrency trades. Crypto tax avoidance goes in breach of IRS regulations. Since property transactions undergo capital gains tax that must be reported on Form 8949, the same applies to cryptocurrencies.
What is a “taxable event” in the United States?
This is any action that raises a tax reporting liability. Whenever a ‘taxable event’ happens, you trigger a capital gain or loss that needs to be reported on your tax return. For example, a taxable event occurs when:
- You trade cryptocurrency to fiat currency e.g. the US dollar;
- You trade cryptocurrency to another cryptocurrency, for example trading Bitcoing (BTC) for Ethereum (ETH) – it is important to calculate fair market value in USD at the time of the trade;
- You use cryptocurrency for goods and services – again, calculate the fair market value in USD at the time of your trade;
What is NOT a ‘taxable event’?
Some events do not count as taxable events as they do not trigger tax reporting liability. For example:
- Gifting cryptocurrencies
- Wallet-to-wallet transfer of cryptocurrencies
- Buying cryptocurrency with USD – you do not realise gains until you dispose of crypto.
For example, if you purchase 2 BTC from Coinbase and send them to your offline wallet, you will not need to report this as moving crypto from one place to another as it is not a taxable event. But if you send those 2 BTC to Binance and start trading for other altcoins, you will have triggered a taxable event. You will need to report it and file with your tax return, even if you record a loss while trading.
The amount of tax you will pay will depend on how long you have held your crypto:
- Cryptocurrency sold within one year of purchase is subject to short term capital gains tax. Short term gains are added to your income for tax purposes and are subject to your ordinary income tax rates.
- Cryptocurrency sold after one year is subject to a long term capital gains tax which is 0%, 15% or 20% depending on your taxable income and filing status.
Crypto Taxation in the United Kingdom
Depending on certain circumstances, cryptocurrency profits may be taxable as capital, income or not at all:
- If you hold cryptocurrency as an investment, it will count as an asset for Capital Gains taxation.
- If you trade cryptocurrencies, the profits you obtain from such trades will be taxed as income tax. If you are a non-resident trading in the UK but are permanently established there, your crypto income will also be subject to income tax.
- In general, if you have been involved in highly speculative transactions, e.g. online gambling with cryptocurrencies, such profits are usually not subject to taxation (nor losses reliveable).
- Non-domiciled UK residents are subject to tax only on non-UK source income and gains on the “remittance basis”. The “source” of cryptocurrency is unclear and there is no view expressed by the UK Tax Authority.
For companies (subject to corporation tax):
- Profits or losses on exchange movements between cryptocurrencies are taxable income.
According to the UK Tax Authority’s guidance on provisional VAT treatment of cryptocurrencies:
- Revenue received from crypto mining activities is outside the scope of VAT.
- Revenue received by miners for other activities, such as for the provision of services related to verification of specific transactions where specific charges are made, is exempt from VAT.
- When cryptocurrency is exchanged for Sterling or for other fiat currencies, such as Euros or Dollars, no VAT is due on the value of the cryptocurrency.
- Charges made over and above the value of the cryptocurrency for arranging or carrying out any transactions in Bitcoin are exempt from VAT.
- For payment in cryptocurrency for goods or services, the value of the supply on which VAT is due will be the Sterling value of the crypto at the point the transaction takes place.
Crypto Taxation in France
- When profit is made from a cryptocurrency trade, France treats it as a capital gain on an intangible assets which is taxed at 19% plus 17.2% social contributions (i.e. a total rate of 36.2%).
- When profits are made from mining, it is treated as industrial and commercial profit, which will be taxed according to a progressive tax schedule – 45% of marginal plus social contributions.
- For companies, crypto profits are taxed following the corporate tax regime for profits and losses, whereby corporate income tax sits at 33.3%.
France has no specific VAT laws regarding cryptocurrencies, however, the French Supreme Court believes that:
- Revenue from crypto mining is subject to VAT as a supply of services.
- When crypto is exchanged for fiat currencies e.g. Euro, no VAT is due on the value of the cryptocurrency.
- Carrying out any transactions in Bitcoin and earning over and above the value of it is subject to VAT.
- Buying goods and services through crypto payments is subject to VAT.
- Unless made to obtain income on a continuous bases, the sale of cryptocurrencies is not subject to VAT.
Crypto Taxation in Brazil
As of 2016, Brazil’s federal tax authorities state that taxpayers:
- Must declare their cryptocurrencies in annual tax returns as “other assets”
- Pay income tax on capital gains derived from the use or disposition of cryptocurrencies, provided that the total value of cryptocurrencies disposed of in any given month exceeds BRL 35,000 (~$8,500).
- Tax rates vary from 15% to 22.5%.
Since May 2019, Brazil’s tax authorities issued Normative Instruction No. 1,888/19 which sets out reporting obligations for Brazilian-based exchanges, legal entities and individuals transacting cryptocurrencies via exchanges outside of Brazil. For example:
- Individuals must report any transactions carried out whenever the value exceeds BRL 30,000 every month (in a single transaction or series of transactions)
- Exchanges must report any amount on all transactions carried out on their platforms in the relevant month.
The Normative Instruction states that every year, exchanges in Brazil must provide:
- Total amount in BRL of cryptocurrencies held;
- The quantity of each cryptocurrency held;
- The cost of each cryptocurrency held.
Failure to report is subject to fines between BRL 100 and BRL 1500 per month of delay, while inaccurately submitted forms will be fined between 1.5-3% of the respective transaction amount.
Crypto Taxation in Australia
The Australian Tax Office (“ATO”) provides guidance on crypto taxation. The ATO classes digital currency as property and as an asset for CGT purposes.
Cryptocurrency holders are required to keep records of every capital gain event for five years after a crypto asset is disposed. If the assets have been held by an individual for 12+ months before the relevant CGT event (disposal), then the CGT Discount Method may apply. To calculate the capital gain, subtract the cost basis (including fees) from the capital proceeds, deduct any capital losses, and then reduce the capital gain by the relevant discount percentage:
- 50% for resident individuals (including partners in partnerships)
- 33.33% for complying super funds and eligible life insurance companies
- 50% discount is removed or reduced on capital gains made after 8 May 2012 for foreign resident individuals
If the assets have been held for less than 12 months before the relevant CGT event, then the discounts will not apply.
How you can claim Capital Loss if you lose your Private Keys
If you lose access to your cryptocurrency, then you may be eligible to claim a capital loss in any of the countries reviewed above. To claim the loss, you will need to be able to provide the following kinds of evidence:
- when you acquired and lost the private key;
- the wallet address that the private key relates to;
- the cost you incurred to acquire the lost or stolen cryptocurrency;
- the amount of cryptocurrency in the wallet at the time of loss of private key;
- that the wallet was controlled by you (for example, transactions linked to your identity);
- that you are in possession of the hardware which stores the wallet;
- transactions to the wallet from a digital currency exchange for which you hold a verified account or that is linked to your identity.
Every country in the EU and outside of the EU has its own position on cryptocurrency taxation. We recommend you visit relevant legislation websites to clarify each country’s stance before buying, selling, trading or investing cryptocurrencies. Generally, crypto assets are classed as property, so they are mainly taxed following countries’ property taxation rules.
Many of you wonder if minimizing cryptocurrency tax liability is possible in a legal and tax-compliant way. Even though cryptocurrencies are not officially recognized universally the same way that fiat currencies are, the profits you make from crypto transactions are often open for inspection by the local tax authorities, especially if held on centralized exchanges. Hence it is recommendable to keep good track of your crypto gains and losses and to comply with tax authorities whenever you have been using exchanges for trading.
If you have not yet done so, we highly recommend that you discuss your cryptocurrency tax management with an accountant who is familiar with the topic to avoid any bad surprises in the future.