Crypto taxes 2021: A guide to UK, US and European rules
From high level tax implications to the actual tax forms you need to fill out, the world of cryptocurrency taxes can seem pretty daunting and complex at first.
Many people aren’t aware that any exchange of cryptocurrencies is a taxable event. Crypto is taxed in the same manner as gold or property. The common misconception is that because crypto is anonymous, it’s not subject to taxation.
This couldn’t be further from the truth. Governments in many countries are clamping down on crypto markets and transactions by introducing new legal and regulatory frameworks that seek to increase the traceability of crypto-asset transfers.
The basics of crypto taxes
A crypto asset usually refers to types of digital financial assets that are based on distributed ledger technology (DLT), such as blockchain, and cryptography as part of their perceived or inherent value.
Just like other forms of assets such as stocks, bonds and property, crypto traders incur capital gains and losses on their investments. It’s calculated as the difference between the price you bought the crypto for and the selling price, less any exchange fees.
Depending on what tax bracket you fall under, you will pay a certain percentage of tax on this capital gain. Tax rates are also based on whether the gain was short-term or long-term.
Whenever you make a taxable event from crypto investing activity, you trigger a tax reporting requirement. According to a report by the Organisation for Economic Cooperation and Development (OECD), the first possible taxable event related to a unit of virtual currency arises when it is created.
Even if you were to make a loss, you are still required to file for taxes on crypto. The taxation of crypto assets applies to all of the following events below.
However, it is worth noting that transferring crypto between wallets you own is not taxable.
Crypto tax rules around the world
Crypto-assets and virtual currencies in general have become an issue for policymakers since their creation in 2009, according to the OECD paper.
Challenges include a lack of centralised control, pseudo-anonymity, valuation difficulties, hybrid characteristics, including both aspects of financial instruments and intangible assets, and the rapid evolution of the underpinning technology of these assets. In addition, tax policymakers are still at an early stage in considering their implications.
A study by the European Parliament also finds this is problematic because the aforementioned blind spots created by crypto-assets can be pursued by criminals and other illicit actors to launder money and engage in activities such as tax evasion.
Most notably, the study makes recommendations for the continuation of investment into “initiatives that add to the investigative toolbox of law enforcement agencies who are trying to track down illicit activities such as tax evasion via crypto-assets”.
The use, trade and level of market capitalisation of these assets has led to policymakers in the UK, US and Europe responding by issuing guidance and legislative frameworks for the tax treatment of crypto-assets.
What is the tax treatment of cryptocurrencies in the UK?
Earlier this year, HM Revenue & Customs (HMRC) published its Cryptoassets Manual. It contains new guidance on the taxation of staking rewards and derivatives. The guidance includes a newer method for validating transactions on the blockchain, whereby the validator stakes their own tokens in confirming the authenticity of a transaction.
HMRC does not consider cryptocurrency to be currency or money – it is viewed as property and thus taxed as either Capital Gains Tax (CGT) or Income Tax.
UK residents are subject to Capital Gains Tax at a rate of up to 20% on disposal of cryptocurrency. Income tax may apply at a rate of up to 45%. Also, employees must pay Income Tax if they are paid in exchange tokens. HMRC cryptocurrency tax gains can be reported in a Self Assessment tax return.
What is the tax treatment of cryptocurrencies in the US?
The Internal Revenue Service (IRS) classifies cryptocurrencies as property. According to the IRS, investors need to declare their crypto profits and losses in their annual Income Tax return or through a Schedule D form.
Short-term capital gains are dependent on your tax bracket, which ranges from 10% to 37%. Any gains or losses made from a crypto asset held for longer than a year incurs a tax of 0%, 15% or 20%, depending on individual or combined marital income.
If your capital losses exceed your capital gains, the amount of any excess loss that you can claim to lower your income is less than $3,000.
A 2021 bipartisan bill, which has the provision to levy taxes on digital currency transactions, could impose new tax reporting obligations on cryptocurrency brokers, requiring them to report transactions to the IRS.
The IRS already requires crypto investors to pay a tax on earnings they make from investment gains, but this new provision is aimed at improving the enforcement of current crypto tax laws.
Some individuals in the US are of the view that crypto ought to be treated more like foreign currency than property.
Laura Walter, a CPA and cryptocurrency tax specialist who provides educational courses on how to calculate and report crypto gains or losses, believes that there should be “a de minimis rule for crypto where gains under a certain threshold (for example, less than $500) are exempt from tax”.
In Laura’s view, the implementation of a de minimis rule in the US could make crypto adoption and usage in the economy a lot easier, which could potentially lead to state-wide acceptance for the digital asset.
What is the tax treatment of cryptocurrencies in Europe?
Taxation varies by country within the EU, ranging from 0 to 50%. For example, in Germany, cryptocurrency is viewed as a private asset which means it is subject to Income Tax rather than Capital Gains Tax.
Any gains or losses held for less than a year are taxed at the same rate as the personal Income Tax rate, but after a holding period of one year, gains become completely tax-exempt.
In Spain, crypto is taxable under Personal Income Tax (PIT) and profits are subject to a CGT that ranges from 19% to 23%. Last year, the Spanish government created a new law that includes measures to combat tax fraud linked to cryptocurrencies. In Spain, it’s mandatory for every crypto-asset holder to disclose not just the value of their assets but also the interest earned on those assets.
In recent years, the EU's Fifth Anti-Money Laundering Directive (5AMLD) and 6AMLD have come into effect, which tighten know your customer (KYC) and Combating the Financing of Terrorism (CFT) obligations, and standard reporting requirements. The KYC process is a legal requirement intended as an Anti-Money Laundering (AML) measure, while CFT compliance refers to a set of banking policies and standards used by financial institutions to adhere to the requirements of AML laws.
In September 2020, the European Commission published a proposal called the Markets in Crypto-Assets Regulation (MiCA), a framework that increases consumer protections, establishes clear crypto-industry conduct, and introduces new licensing requirements.
MiCA crypto regulation has the potential to set global standards for the oversight and regulation of digital, blockchain-based assets by implementing clear-cut rules and long-term legal certainty.
Florian Wimmer, ex-Digital Marketer at KPMG who founded Blockpit, a company that develops compliance solutions to solve taxation and anti-money laundering issues within the cryptocurrency markets, supports such initiatives.
Wimmer, a Forbes 30 Under 30 winner in 2018, argues that tax transparency and honesty are “almost nonexistent in most countries”. His remedy is to increase know-how as well as offering practical solutions.
Capital.com does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
FAQ
Do I have to pay taxes on crypto gains?
Yes. Crypto is treated for tax purposes in much the same way as any other asset such as gold or property. In fact, any exchange of cryptocurrencies is a taxable event.
How do I pay taxes on cryptocurrency?
It varies in each country. Although, in most places across the world such as the UK, US and European region, the amount of capital gains tax you owe depends on your tax bracket, how long you’ve held your assets for (long-term or short-term) and your Income Tax rate.
When do I pay taxes on crypto and how do I calculate this?
As you’ll see from our crypto tax guide, this varies with each country. For example, in the UK, crypto gains are reported alongside your regular tax return which can be filed between 6 April and 31 January of the following year. In the US, for instance, you can declare your crypto profits and losses through a Schedule D form.