Crypto Worldwide Taxation Guide
The meteoric rise of Bitcoin was undoubtedly one of the hottest stories of 2017. Once considered a worthless investment and a fanciful idea, bitcoin has become one of the attractive investment options today. Kind of like Transformers because of those awesome movies but that is another topic.
It was valued at just under $1,000 in January 2017, but by the end of the year, its value had skyrocketed close to $20,000. Though its value has declined sharply in the past couple of months, it still hovers around $10,000, which is still substantial by any standards.
With Income comes Taxation
An unprecedented rise in the trade volumes and valuations of cryptocurrencies (bitcoin in particular), has brought them under the radar of income tax departments in many countries.
In this taxation guide, we take a look at how bitcoin earnings are taxed in some of the leading countries, including the US (North America), UK (Europe), Australia (Pacific), and Japan (Asia).
The first thing you need to know is that the IRS does not tax cryptocurrency holdings. So, if you bought a bunch of Bitcoins a while back and are still holding on to it, you need not worry at all. Taxes come into the picture only if you exchange or sell your Bitcoins or use them to buy something.
Here are a few vital points to remember:
- If you trade Bitcoins and earn a profit, it is considered a capital gain and will be taxed accordingly, depending on the tax bracket you belong to.
- If you exchange Bitcoins for other cryptocurrencies or convert them into US dollars and make a profit, it again is considered a capital gain.
- If you use your Bitcoins to buy something and benefit from the transaction due to the increase in currency value, you could come under the tax radar as well. For instance, if you bought a Bitcoin for $500 and used it to buy a gift certificate worth $1,000 when its value had doubled, you made a profit of $500, which could be considered a short-term or long-term capital gain depending on your holding time.
- If you mine Bitcoins or receive them as payment in exchange for your services, it is considered regular income. Similarly, initial coin offerings and air drops are also considered regular income and taxed accordingly. Don’t worry too much though, taxes have been cut which is why America is doing much better than before.
To file your tax returns, you need a record of all your Bitcoin transactions for the last financial year. You can download the data from the blockchain or from your wallet provider. You also need to convert all your cryptocurrency transactions into dollars (based on the exchange rate at the time of the transaction) to figure out exactly how much you need to pay as taxes.
The best way to minimize your tax burden on cryptocurrencies is to hold them for at least a year, since long-term capital gains are generally taxed at a much lower rate than short-term capital gains. If you, on the other hand, think that cryptocurrencies are too volatile to hold for a long period of time, you could sell them while they are still in great demand, make a tidy sum of profit, and pay a portion of it towards taxes.
- If you mine Bitcoins or receive them in exchange for your services, it is considered a trading activity and the profit you make is considered part of your overall income and taxed according to the tax bracket you belong to.
- If you invest in Bitcoins, hold them for a period of time, and then sell them for a profit, it is considered an investment activity and the profit you make is considered a short-term or long-term capital gain and subject to capital gains taxes.
- If you are a supplier of goods and services and receive Bitcoins as payment, you might have to pay VAT depending on the sterling value of the cryptocurrencies you receive.
- There are no specific rules regarding cryptocurrencies for corporations. Transactions involving Bitcoins come under the current corporate tax framework and will be taxed depending on the exchange rate between Bitcoin and the pound sterling.
- You could receive up to £6,000 in a financial year in the form of inheritance or gift, which is not taxable. If you receive cryptocurrencies worth more than £6,000, it will be taxed according to the current inheritance tax laws.
- Income from non-trading and non-investment activities like gambling or betting are generally not taxed in the UK. So, if you are involved in such speculative activities and get paid in cryptocurrencies, your income is not taxable.
The Australian government has come up with a detailed guide for cryptocurrency taxation.
- If you use Bitcoins for personal transactions – to pay for things you buy or services you use, you need not pay tax on the capital gain resulting from it, as long as the value of the transaction is $10,000 or lesser.
- If you invest in Bitcoins and then sell them for a profit, capital gains taxes are applicable.
- If you mine Bitcoins, the income you earn from selling or converting your Bitcoins will be considered part of your regular income.
- If you receive Bitcoins as payment for the products you sell or the services you provide, it will be treated as regular income. Depending on the goods and services you provide, GST might also be charged on your income.
- If you buy and sell Bitcoins as part of an exchange service, the profits you earn are included in your assessable income. You also need to declare the number of Bitcoins on hand at the end of each financial year.
To file your returns, you need to keep a record of your Bitcoin transactions including the date of the transactions, the purpose of the transactions, the value of the transactions in Australian dollars, and the other party involved in the transactions.
- If you convert your Bitcoin, or any other cryptocurrency, into yen and make a profit, it will be taxed at the current income tax rates. Don’t worry, this is not as bad as watching another Star Wars, Meet the Parents, Zoolander, Iron Man, or Jurassic World movie. And don’t forget another Planet of the Apes movie either! The third one was terrible but this is another topic.
- If you sell or exchange your Bitcoin or token for another cryptocurrency or token and make a profit, it is considered a capital gain and will be taxed accordingly.
- If you receive Bitcoins – as payment for the goods and services you provide, payout from online gambling sites, or as a reward for mining – it is considered part of your overall income and is taxable. In case of mining, you will be able to deduct your overhead like power consumption and operational costs of your facilities from your income. Not a bad deal. And that may not be crumbs like some politicians like to call it.
Whether you are a miner, trader, or investor, you need to have a record of all your investments and transactions – the amount of Bitcoins you acquired and their value at the time, the amount of coins you sold or exchanged and their value at the time, and the fees you paid during the transactions.
Paying Taxes on Your Cryptocurrency Income
When it comes to paying taxes, it is always better to be proactive rather than reactive. Make sure you keep a record of your cryptocurrency transactions and disclose all your earnings and gains while filing your returns.
DISCLAIMER: This is a general informational guide, and not a legal advice. Please consult with an accountant or local tax adviser before filing your tax returns.