Tax season is always a somewhat reluctant task for many of us. Figuring out what to request, what interruptions you’re entitled to, and whether you owe or will receive money after the presentation can be a stressful thing. For those of us who find ourselves in this wild world of cryptocurrency, crypto fees can be doubly stressful and certainly confusing. There is so much gray area and complexity when it comes to crypto regulation that it can be tempting not to report your cryptocurrency on your taxes at all.
However, this can lead to more problems and headaches than simply filing such taxes. In this guide, we’ll discuss why you need to pay taxes on cryptocurrencies and what might happen if you don’t.
What can happen if you don’t pay taxes on cryptocurrencies?
It’s a good idea to pay taxes on cryptocurrencies for the obvious legal repercussions that could arise if you don’t. By not paying crypto fees you open yourself up to things like fines, interest on money owed, and in the worst case, jail time. However, what is considered a taxable event with cryptocurrency varies from country to country, as do the amounts of taxes that are levied on such events. For all countries, capital gains taxes are paid only on the profit made by the user, not on the total amount. Below we have outlined some of the most common taxable crypto transactions for the US, Canada, and the UK, along with whether they are capital gains or income. Please take this guide only as a starting point and not as actual tax advice.
The United States, as you might expect if you live outside of it, has less taxes on cryptocurrencies than the other two countries in this guide. They also have fewer taxable events for capital gains on cryptocurrencies than the UK or Canada. In the United States, capital gains are only paid when you sell cryptocurrencies for fiat currency, exchange one crypto asset for another, or spend it on goods and services. Tax rates for U.S. capital gains start at 10% for cryptocurrencies, rising to 37% depending on household income and marital status. There are also some benefits to maintaining your cryptocurrency for the long term. The United States allows you to give up to $16,000 in cryptocurrencies, per person, tax-free. This can be a good way to reduce taxes within a family by giving crypto to a spouse, although it can also reduce overall taxes by giving to any person/more people. It is considered taxable in income in the United States if you receive cryptocurrencies to be paid in it, mining, airdrop, hard fork, staking or referral. This is apparently the same in all three countries present. Essentially, if you are earning cryptocurrencies in some way, this is income and can be taxed as such. Day trading cryptocurrencies would also be considered income rather than capital gains.
In Canada, capital gains are paid in cryptocurrency when you sell it for CAD, exchange it for other crypto assets, spend it on goods and services, or give it to someone. The latter is in stark contrast to the US, which allows you to give up to $17k USD (over $20k CAD) to someone without any fees. Capital gains tax also starts at 15% in Canada, compared to 10% in the United States. The only difference between cryptocurrency income tax when comparing Canada to the United States is that the tax rate varies depending on the province you live in and your household income. Simply add your crypto income to your US federal income tax report. As in the United States, day trading is considered a taxable event on income rather than capital gains.
In the UK, capital gains are paid on all the same provisions as in Canada, except that it is allowed to give cryptocurrencies to your spouse in any amount (probably an amount that does not affect their capital gains allowance) without paying taxes on that transaction.
Capital gains tax starts from 10% for household incomes up to £50,270, increasing to only 20% if you earn over £150k, which is also the maximum rate.
HM Revenue and Customs (HMRC) is also the only federal tax agency in this guide that has a fully defined tax guide for decentralized financial transactions (DeFi). They have determined that income tax will only apply on a return you receive from an asset. This could include rewards from staking, yield farming, loans, and more. HMRC will likely consider it income if:
- The return you receive has been agreed
- If your return is paid by the borrower/DeFi platform
- If your return is paid periodically throughout the loan/staking period
Tax-free crypto transactions
While there are some
taxable crypto transactions, there are also some types that are tax-free in the three countries in this guide. If not specified, they apply to everyone. Are:
- Buy Crypto with fiat
- Moving cryptocurrencies between your wallets
- Keep it after purchase
- Kingdom), gift crypto to anyone (United States)
- Creating a DAO (Canada)
- Donate cryptocurrencies to charity (US and UK)
- Creating an NFT (US)
Be crypto gifted (Canada), gift crypto to spouse (United
Taking any of the above actions is tax-free assuming you are in that jurisdiction. Gifting cryptocurrencies can be a good way to reduce taxes in both the US and UK, although it is not an option in Canada.
Even if you are not in green for the year, you should definitely report your cryptocurrency on your taxes this year and every year. Not doing so can open you up to long-term legal repercussions, especially if there comes a point where you’re suddenly ready to reap a big profit.
While crypto fees can be evocative, there are plenty of options when it comes to fiscal crypto software like Koinly that can help you navigate their complexity.