First things first, Is bitcoin even legal? It’s a valid question, especially considering the ambiguity around how some governments may treat cryptocurrencies and the uncertainty surrounding bitcoin taxes.
Bitcoin is an asset. There is no ambiguity around that. However, there have been some governments that have cracked down on the use of cryptocurrencies, especially due to its role in online black markets.
It is Completely Legal to Invest in and Hold Cryptocurrencies
Let me make this clear, there is not a single government that has made it illegal to buy and hold cryptocurrencies. All of the negative news coverage around cryptocurrencies is either regarding black marketplaces, unreported money transfers or companies operating with cryptocurrencies without the necessary licenses.
For example, a cryptocurrency exchange has to take in investor deposits in order for their customers to trade on their online platforms. However, in almost every jurisdiction, you must have a banking license or a financial services license that allows companies to accept deposits from the general public.
Similarly, if someone using cryptocurrencies to hide their wealth from the government, they could be in violation of the law. The act of holding cryptocurrency is not criminal, rather how it’s being used that could be potentially criminal.
So again, investing in and owning bitcoin is completely legal as long as you follow all of the laws in your country.
The year 2017 proved to be quite a remarkable year for cryptocurrencies. Bitcoin pretty much had its coming-out party. Bitcoin investors had their own parties. The year ended with over 2,000% gains in bitcoin alone. The numbers in other cryptocurrencies are even more remarkable.
However, in all of the excitement, we mustn’t forget to pay our taxes. We did, after all, make a lot of money and so we owe big brother a part of the proceeds. The year also saw another important event. The Trump Administration officially defined cryptocurrency as a taxable digital commodity with their new tax code signed on the 22nd of Dec 2017.
There are but a few certainties in life and unfortunately, taxes is one of them. One bright side, a hefty tax bill usually represents a good year and so let’s focus on the positive aspect and make sure we deal with our cryptocurrency related taxes as quickly and easily as possible.
First off: Is Cryptocurrency Even Taxable?
In pretty much every jurisdiction around the world, all forms of incomes are taxed. Unless there are certain exemptions, you have pay taxes if you made a certain amount of money and capital gains related to cryptocurrencies are no different.
So the real question isn’t if cryptocurrency taxable, rather how its treated by the tax code in our respective countries and what exactly is our effective tax rate. I doubt anyone wants to pay more than they need to.
The Recent Changes in the US Tax Code
As I mentioned earlier, President Donald Trump signed a new tax code that had some changes that fundamentally affect us cryptocurrency investors. I want to first go over these changes and how they might affect us on a personal level.
First of all, I just want to clarify that you always had to pay taxes, even before the recent changes to the tax code. The recent change in the tax code addresses a specific aspect of the cryptosphere, particularly, the cryptocurrency exchanges.
The Like-Kind Exemption
Prior to the recent changes in the tax code, there was a particular loophole in the tax code called the like-kind exemption. The exemption was intentionally written to allow traders and brokers to exchange and transfer certain assets such as art and real estate without having to pay taxes on each and every transfer.
When this exemption was written into the tax code, cryptocurrencies wasn’t exactly a consideration for the tax officials. This meant that cryptocurrencies were not treated like other frequently traded financial assets such as stocks and bonds. The thing is, every transaction involving stocks and bonds require paying taxes on the value of the transaction.
Taxes on Cryptocurrency Exchanges
Cryptocurrency investors and exchanges used the loophole to claim that cryptocurrencies are akin to property, which allowed them to avoid paying taxes on each and every transaction. This change essentially means that your coinbase taxes will increase based on the value of your transactions.
So basically now every single trade you make on exchanges, you will be charged a percentage of the transaction’s value as tax. This, however, does not mean that you will have to send a check for every single transaction. Your respective exchange will automatically charge you for every transaction along with its transaction fees.
All You Need to Know about Cryptocurrency Taxes
Capital Gains Tax
Capital gains tax is a form of tax that is applied to gains made on investable assets, which includes digital assets such as bitcoin or ether.
Whether you’re a long-term investor or a short-term trader, if you made money from the change in the price of your digital assets, you will be required to pay capital gains tax on those capital gains.
Even if you exchange one type of cryptocurrency for another, if the value of your initial investment increased, you will be required to pay the respective capital gains tax on the transaction. Capital gains tax is not restricted to when you convert your cryptocurrency to fiat currency.
However, if you do not sell your bitcoins or exchange it for another cryptocurrency, you will not be required to pay capital gains tax. Capital gains tax is only applicable when you realize or sell or transaction your gains, which means, you’ve completed the transaction and booked the profits.
Last but not least, especially considering the nature of the cryptocurrency market, you can use your losses to offset the gains in another fiscal year. This means that if you had a capital loss, you can use those losses to lower your forthcoming tax bill or even ask for a rebate depending on your jurisdiction.
Income Tax on Cryptocurrencies
Aside from capital gains tax, you can also be required to pay income tax on your cryptocurrencies. For example, if your employer wishes to pay you for your services in cryptocurrencies, you won’t be liable to pay capital gains tax.
The payment, irrespective of its medium, would be considered as income and taxed according to its fair market value at the time of the transaction. However, if the value of that cryptocurrency increases by, let’s say, 5%, you would also have to pay capital gains on that 5% increase and not the total amount you received as remuneration.
If you’re using one of the lending platforms to provide liquidity to traders, you will be receiving income in the form of interest. All of the interest income you receive in a fiscal year would be taxed as income tax. As long you don’t sell or exchange your interest income, you won’t be required to pay any capital gains tax on it.
Tax Considerations for Spending Cryptocurrencies
There are a number of companies that accept cryptocurrencies as a medium of payment, which means we have to talk about tax implications for spending cryptocurrencies for goods and services.
If you pay for something using bitcoins, for example, you might incur a capital gain or loss in the process. For example, if you acquire bitcoin just to buy something online and the price of bitcoin doesn’t change in the time it takes you to acquire bitcoins and use it to pay for your goods, there will be no taxable event aside from the sales tax.
However, if you use your bitcoins to buy something and the value of your bitcoins have appreciated in the meanwhile, you have had capital gains and you will be required to pay taxes on those gains.
On the other side, if the value of the bitcoins used paying for your purchase decreases, you’ve incurred a capital loss. This means you can use the loss to offset any other capital gains you might have incurred. If you did not incur any other capital gains, you can carry forward those losses into the next fiscal year and deduct it from future capital gains.
Tax Considerations for Cryptocurrency Miners
Cryptocurrency mining is like any other business. You make a capital investment in hardware and incur variable costs in terms of the electricity you use. You do this in the hope of making a profit by mining new coins.
Since this is a business, you will have to pay income tax on incomes after you’ve covered your expenses. Meaning, you will be taxed only on your profits and not on all of your revenues. If you incur capital gains on the freshly mined coins, you will be required to pay capital gains tax when you sell or exchange those coins.
How to Report and Pay Taxes
How you report and pay your taxes mostly depends on the jurisdiction you’re in. I will try to cover a few countries at the end of the article but before that, I will still go over in general how to deal with bitcoin taxes when cryptocurrencies are involved.
When To Report and Pay Taxes
Like any other taxes, you will pay your bitcoin taxes when the fiscal year ends, you know when the tax season begins. This really depends on which part of the world you’re in. Basically, the fiscal year of your country.
How to Pay Taxes
Once you’re reported your taxes by filling your tax returns and are ready to pay your taxes, you will have to actually make the payment. Different governments have different rules for how you can pay your taxes.
Tax Laws in Different Countries
Let’s briefly go over the different laws in a few different countries:
In America, you have until the 15th of April to file and pay your taxes. You can pay your taxes using a check, a money order, debit card and credit card.
Since most of your cryptocurrency income will be in the form of capital gains, you will have to pay the respective capital gains tax rate based on the following tax bracket. Moreover, you can deduct your capital losses, if any, from the total capital gains.
The Federal income tax brackets for the current fiscal year due April 15th, 2019:
Head of Household
Up to $9,525
Up to $13,600
$9,526 to $38,700
$13,906 to $51,800
$38,701 to $82,500
$51,801 to $82,500
$82,501 to $157,500
$82,501 to $157,500
$157,501 to $200,000
$157,501 to $200,000
$200,001 to $500,000
$200,001 to 500,000
$500,000 or more
$500,000 or more
Married Filing Jointly
Married Filing Separately
Up to $19,050
Up to $9,525
$19,051 to $77,400
$9,525 to $38,700
$77,401 to $165,000
$38,701 to $82,500
$165,001 to $315,000
$82,501 to $157,000
$315,001 to $400,000
$157,001 to $200,000
$400,001 to $600,000
$200,001 to $300,000
$600,001 or more
$300,000 or more
In the UK, you have to register for self-assessment if you’re self-employed. You have to do this by the 5th of October. After this, you have to file your tax returns by 31st of Oct and 31st of January if filing online and pay the tax you owe by the 31st of January.
As for capital gains, you will be required to pay 20% of your capital gains income. For more information, you can visit the UK Gov website.
UK income tax brackets for 2018 – 2019. Moreover, these rates are only applicable if you live in England, Northern Ireland and Wales. The Scottish government sets their own rates, which can be found at their official government website.
Up to £11,850
£11,851 to £46,350
£46,351 to £150,000
£150,000 and above
If you live in Estonia, you are required to submit your tax return from 15th February to 2nd April. You can submit your returns in via your ID card, your mobile ID and through internet banking.
You can also use the E-Estonia website, which is considered the most efficient taxation system in the world.
Estonia does not have any income tax brackets. Instead, the government levies a proportional flat rate tax of 20%, which applies to all incomes with a few exceptions. Visit the official Estonian website for more information.
The Swiss fiscal year corresponds with the calendar year, which means the tax year ends on 31st December and you are required to file and pay your taxes by 31st of March.
Due to the sheer size of the Swizz tax bracket, I couldn’t possibly put in the article. You can visit the PWC website for the tax brackets and the Swiss govt. website for more information on different tax procedures.
The Russian Federation levies a flat rate personal income tax rate of 13% on most incomes with a few exceptions such as excess interest income, dividends, etc. This also includes taxes on capital gains unless you’re a non-resident in which case, you will be required to pay 20% capital gains tax.
The Russian fiscal calendar runs from the 1st of January to 31st of December. You are required to submit your tax returns by 30th of April and pay your taxes by the end of 15th July. You can visit this guide for a comprehensive look at the Russian tax code.
Conclusion on Bitcoin Taxes
As you can see, a lot of effort went into creating this bitcoin taxes guide. If you found this article helpful and informative, I can assure you the rest of the articles are just as informative and helpful. That’s why you should check out the rest of the articles and get to speed on everything that is crypto.
Oh and don’t forget to share this article with your crypto investor friends. Gotta make sure they pay their bitcoin taxes on time.