Most of the time, earning money through cryptocurrency isn’t “tax-free”. Tax authorities in your country may struggle to understand the mechanisms behind cryptocurrency, but they do know how to recognise profit and get their share of it. So, how is cryptocurrency taxed? Well, it depends a lot on where you live.
Virtual currency owners owe taxes for their activities in almost all countries, but there’s no one-size-fits-all policy in place. The general rule seems to be that cryptocurrency isn’t considered an actual currency, but “investment property” for tax purposes.
Depending on where your tax residency is, you may benefit from some exemptions. Here’s what you need to know about how cryptocurrency is taxed.
How is cryptocurrency taxed in the US?
The IRS published the first set of instructions on cryptocurrency taxes back in 2014. The organisation has been making changes to keep up with the crypto world. In the US, you are required to pay your taxes every time you make capital gains and losses.
This means that you’ll pay taxes when you:
- Exchange cryptocurrency to fiat currency
- Trade cryptocurrency to other cryptocurrency or tokens
- Buy goods or services and pay with cryptocurrencies
- Receive free coins through an airdrop or bonus
That being said, you also owe taxes for trading virtual currencies even if you didn’t cash anything out over the past year. Make sure you keep accurate records of your trading activity and any gains and losses. Trading outcomes should be registered by filling out and submitting Form 8949.
Cryptocurrency taxes resulting from mining count as ordinary income, and you’ll need to file for “other income” taxes.
How is cryptocurrency taxed in the UK?
In the UK, cryptocurrency taxes are pretty similar to the US. The taxation of crypto assets and cryptocurrencies depends on the nature and use of the token. As a guideline, Her Majesty’s Revenue and Customs (HMRC) treats holding crypto assets by individuals as personal investments. So, owners are liable to pay capital gains tax when they trade cryptocurrencies to fiat or other tokens.
People who receive income in the form of cryptocurrency must pay income tax and National Insurance contributions. This applies to mining, airdrops, and non-cash payments from an employer.
How is cryptocurrency taxed in the EU?
The European Union is working on a set of general rules for the taxation of cryptocurrencies. But currently, each country deals with crypto by its own rules. So, broadly, how is cryptocurrency taxed in some European countries?
Germany seems to have a state-of-the-art policy regarding cryptocurrency. The country encourages the adoption of long-term investments in cryptocurrency, as well as blockchain innovation.
In Germany, the only situation in which you pay a capital gains tax is when you have held your crypto for less than one year. Also, the income you make from mining activities is outside the scope of VAT.
Italy doesn’t have specific tax rules for cryptocurrencies. As speculative activities are taxed, you may owe the Italian state a quarter of your profits as tax. This could happen if you have more than €51,000 worth of crypto assets for more than seven consecutive days in one fiscal year. People who earn their income in crypto should declare their earnings and pay tax for revenue.
In Sweden, selling and exchanging cryptocurrencies usually triggers capital gains taxation. However, when you hold your cryptocurrency as stock, the gain on disposal is taxed as income from business operations. The country also taxes income from mining as income from employment or income from business operations, depending on the context.
France seems to be the worst place to trade cryptocurrencies in Europe at the moment. Here, profits from cryptocurrency-related activities are seen as capital gains from intangible assets, so you’ll pay a flat rate plus social contributions. For tax purposes, price speculation and mining are seen as industrial and commercial profits, where a progressive scheme is used to calculate taxes.
Countries that don’t tax all cryptocurrency investments
There’s a tiny list of countries where most cryptocurrency investments benefit from tax exemptions. Besides Germany, other crypto-friendly states are:
- Singapore – profits from crypto trading are taxed as ordinary income, and long-term investments aren’t taxed at all.
- Malta – profits from long-term investments in cryptocurrencies or other assets aren’t taxed.
- Portugal – the country has set an exemption for personal income from crypto. However, businesses should pay taxes for activities that include cryptocurrencies.
- Belarus – profits from most crypto-related activities, including trading and mining, are tax-free until 2023.
- Switzerland – people who invest in and trade cryptocurrencies benefit from some tax-exempt capital gains. However, income from mining is taxed.
The bottom line
Crypto taxation differs from country to country, so you should check with the local authorities before filing your taxes. It’s a delicate area, as most countries are still working on new tax rules to accommodate cryptocurrencies.
So, try to stay updated with the latest local news to make sure you pay all your debts and benefit from all possible exemptions.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.