Over the past few years, while cryptocurrencies have gained dizzying popularity, their rising usage has also sparked concerns about their tax implications.
The world of crypto tax is a complex labyrinthine where your foremost consideration should be determining whether you actually need to pay tax on cryptocurrency. It is because how cryptocurrencies are taxed can differ based on the country and specific activities involved.
In some global hotspots such as Bahrain, Singapore, and the UAE, the sale of stocks or digital assets often escapes the clutches of capital gains taxes. However, in certain nations, these taxes can be a heavy burden to bear. Moreover, some jurisdictions like the United States take a unique approach to taxing its citizens whereby citizenship and residency both come into play. In other words, US citizens must pony up the taxes to the US government even if they are living abroad.
That said, another important aspect to be aware of as a crypto investor is the prevalent types of taxes applicable to cryptocurrencies. Typically, the first is the capital gains tax, which is imposed on any profits gained from selling or exchanging digital assets. If you hold your cryptocurrencies as an investment and sell them for a profit, you may have to pay this tax.
The second potential tax is the income tax. If you receive cryptocurrency as payment for goods or services you provide, the value of the digital coins received may be subject to income tax. To put it simply, whenever you “earn” crypto, it will be subject to income tax rather than capital gains tax.
In this write-up, we are going to overview the crypto tax laws in some prominent countries, explaining what are the tax liabilities on corresponding residents and how can they minimize the crypto tax burden.
Crypto tax in India
India now implements a heavy tax on profits earned through cryptocurrencies, as announced in the 2022 Union Budget. In the detailed budget, the government for the first time clearly defined cryptocurrencies as “Virtual Digital Assets.”
Although we may not be able to delve into intricate details, here is a summarized picture of prominent crypto tax policies in the country:
- Effective from April 2022, the gains made from trading crypto assets are subjected to a tax rate of 30%, along with an applicable surcharge and 4% cess. Transactions exceeding Rs. 50,000 (or Rs. 10,000 in certain cases) are also subject to a 1% TDS to help the government monitor investments and transaction details.
- Short-term and long-term gains are taxed equally, and there is no provision for a reduced tax rate for long-term capital gains.
- The 30% crypto tax is applicable on certain crypto transactions including selling crypto for INR or fiat currency, trading crypto for crypto, and spending crypto on goods and services.
- Exceptions to the 30% tax rule apply when the Income Tax Department categorizes your money as “Income”. Here, you have to pay taxes as per your individual tax slab rates. These instances can be when you mine cryptocurrency, acquire your salary in crypto, stake cryptocurrency, receive airdrops, or send or receive crypto as a gift – but if you receive a gift of crypto worth more than Rs. 50,000 in a single financial year, you will be liable for income tax at your applicable slab rate on that gift.
- Losses incurred in crypto cannot be offset against any income, including gains from cryptocurrency, as per Section 115BBH.
- The first in, first out (FIFO) and average cost basis are the two most common accounting methods recognized in India for calculating taxable crypto income.
- Moving digital currency between your individual wallets does not entail a shift in proprietorship, and therefore, it is not subject to taxation.
- Buying crypto with fiat currency such as INR is also tax-free unless you are purchasing through a P2P or international platform where TDS is deducted.
- The most recent legislation mandates that the failure to subtract and transmit TDS to the government can lead to punishments equalling 100% of the TDS value, and in particular situations, confinement for a maximum of 7 years coupled with a penalty.
Crypto tax in United States
The IRS (Internal Revenue Service) of the US classifies cryptocurrency as property, which means that crypto income and capital gains are subject to taxation. The amount of crypto tax one is liable to pay in the United States depends on various factors, such as the category of transaction, duration of asset holding, and one’s income level.
Here’s a quick picture of the US crypto tax situation:
- Capital gains arising from crypto income and short-term investments can attract tax rates as high as 37%. However, the tax rates for long-term investments range between 0% and 20%. Note that if a US investor has held a crypto asset for less than a year, short-term capital gains tax rates will apply. However, if they have held crypto for over a year, long-term capital gains tax rates will be implemented.
- Capital gains tax is imposed on all forms of crypto asset transactions, including converting crypto to fiat currency, exchanging crypto for other digital coins, and using crypto to purchase goods or services.
- The IRS has also provided guidance on situations where cryptocurrency may be considered as “income” rather than a capital gain, soliciting tax deductions as per income tax rates. These situations include receiving crypto as payment, mining, and airdrop, among others.
- Certain crypto transactions are not taxable, like buying crypto with fiat currency, holding crypto, transferring crypto between personal wallets, gifting crypto below $17,000, donating crypto, and creating an NFT. Moreover, the “Capital Gains Tax-Free Allowance” applies to total annual earnings below a certain threshold. As per this policy, US individuals with a total annual taxable income of $44,625 or less are NOT liable to pay capital gains tax in 2023.
- You do not have to pay taxes on any crypto capital losses. Instead, you can utilize your capital losses to offset your capital gains and in turn, lessen your total tax payment.
- The 2023 Federal Budget presented by President Biden includes some proposals regarding tax on cryptocurrency investments whereby capital gains tax rates could rise from 20% to 39.6% for investors earning more than $1 million each year.
- The IRS allows for the utilization of multiple cost-basis methodologies to specify the capital gains, which include:
- First In First Out (FIFO): the earliest acquired asset is deemed the first to be sold.
- Last In First Out (LIFO): the most recently acquired asset is deemed the first to be sold.
- Highest In First Out (HIFO): the asset with the highest purchase price is deemed the first to be sold.
- The average cost method: It calculates the average purchase price of all assets in a portfolio.
These accounting methods can greatly affect the amount of taxes owed on your cryptocurrency transactions.
For instance, if an individual purchased 1 BTC for $10,000 in 2020, for $18,000 in 2021, & for $25,000 in 2022, and then sold 1 BTC for $30,000 in 2023, the use of FIFO would present a staggering capital gain of $20,000. Alternatively, by employing LIFO, the capital gain would be much lower i.e., $5,000. Simply put, the taxable income comes out to be significantly lower via the LIFO method as compared to the FIFO method in this case.
Crypto tax in Canada
The Canada Revenue Agency (CRA) has made it crystal clear that cryptocurrencies are subject to taxation as capital property, akin to stocks or rental property.
Let us take a quick look at the crypto tax scenario in Canada:
- Crypto transactions classified as “Income” are subject to complete taxation at regular Federal and Provincial tax rates, while capital gains transactions are also taxed at the standard Federal and Provincial rates BUT on half of the gains.
- Capital gains tax is applied on any profits realized on crypto when you sell it for CAD, exchange it with other cryptos, spend it, or gift it. As mentioned before, you are only liable to pay tax on half of your capital gain.
- In Canada, there is no fixed capital gains tax rate for cryptocurrencies; instead, they are taxed at the same rate as your Federal and Provincial income tax, which ranges from 15% to 33%.
- To calculate crypto capital gains and losses, Canadian investors can use the adjusted cost basis method or the average cost basis method if they own multiple identical assets.
- Note that the 2022 financial year allowed for tax-free income or basic personal amount of up to $14,398, which is now raised to $15,000 for the 2023 taxation year.
- Purchasing cryptocurrency with fiat currency, such as Canadian Dollars, is not subject to crypto tax.
- Capital losses can be used to offset capital gains during the tax year, but the 50% rule for capital gains applies to capital losses as well.
- There is a specific “superficial loss rule” which states that capital losses cannot be offset against capital gains if you sell and buy similar assets within a 30-day period.