Cryptocurrency Taxation: What You Need to Know

Taxation is as old and prehistoric as money or Finance itself. As a custom in many countries, taxes have played a significant role in shaping countries and economies throughout history – from revenue generation to redistribution of wealth, ensuring economic stability, and adding incentives plus economic efficiency. Taxation has implications for countries and economies – and it differs from country to country. It provides governments with the necessary resources and serves as a tool to shape economic behaviour, promote fairness, and drive economic growth and stability.

Crypto taxation is the steps taken in placing taxes on several cryptocurrencies, digital assets, crypto transactions, and every activity on-chain. Governments and tax authorities around the world have been developing regulations and guidelines to address the tax implications of cryptocurrency transactions. There are several crypto transactions that DeFi users, Web3 nerds, and traders actively participate in on the blockchain. Having the knowledge of crypto taxation is not enough, but getting a cut-out grasp on its entirety is the deal. This article would give a sneak peek into what you need to know about crypto taxation.

Also read: Shiba Inu and Dogecoin Whales Are Moving Out to New Crypto Project HedgeUp (HDUP). Guess Why?

Regulators and Crypto Taxations

Regulators play a crucial role in overseeing and establishing guidelines for crypto taxation. As cryptocurrencies have gained popularity and become more integrated into financial systems, governments, and regulatory bodies have recognised the need to address the tax implications of crypto transactions.

It’s important to note that the approach to crypto taxation and the role of regulators can vary between countries and jurisdictions. Some countries have embraced cryptocurrencies more favourably, implementing clear regulations and tax guidelines, while others may still be in the process of developing their frameworks. For example, gains from cryptocurrencies are taxable in India, while in the United States crypto taxation is regulated by the Internal Revenue Service (IRS).

The IRS is the federal agency responsible for administering and enforcing the country’s tax laws. The IRS has provided guidance on how cryptocurrencies are treated for tax purposes, and this crypto taxation regulation covers aspects such as:

1. Classifying crypto as property – This IRS treats cryptocurrencies as property rather than currency for federal tax purposes.
2. Taxable events – Several types of crypto transactions are considered taxable events, including crypto sales or exchange, mining of tokens, airdrops, and hardforks.
3. Reporting requirements – This has the inclusion of “Form 8949” (Taxpayers use this to report each crypto sale or exchange) and “Schedule 1” of the individual income tax return (Form 1040).

Crypto Transactions and Taxations

With several barrages of transactions going on-chain, there are a whole lot of blockchain transactions that are liable to taxations in countries that tax them. From staking to mining to selling and buying and several other transactions. Citing two core crypto transactions: Mining and trading (I.e., Buying, selling, swapping, or crypto-to-crypto transactions), here is a breakdown of their crypto taxation. 

For instance, if you engage in cryptocurrency mining, the rewards or income received from these activities are typically considered taxable income. The fair market value of the mined or staked coins at the time of receipt is included in your gross income for tax purposes. Secondly, when you buy or sell cryptocurrency using fiat currency (Such as USD, EUR, etc.), any gains or losses made from those transactions could be taxable. The taxable amount is calculated based on the difference between the purchase price (Cost basis) and the selling price. Also, trading one cryptocurrency for another, such as exchanging Bitcoin for Ethereum, is generally considered a taxable event.

Crypto Tax-Free Countries

One important thing you need to know about crypto taxation in countries that do not impose tasks on cryptos. Several countries are not only onboarding cryptos into their financial system but also launching digital currencies backed by the central banks. There are over ten countries that exclude taxes on crypto or buffer the payments with certain rules, but here is a list of three tax-free crypto countries you need to know against your next travel or relocation:

1. El Salvador – El Salvador made Bitcoin a legal tender in September of 2021 and has been lenient with crypto taxes. Not only are foreign investors exempted from paying crypto taxes, but the country also announced that it would not impose capital gains taxes on Bitcoin – making the use of Bitcoin as a legal tender attractive to traders and institutions within the country.
2. Germany – Germany gives free tax to everyone, but the condition is to HODL (I.e., Hold) your crypto for over a year. Mining crypto, getting paid in crypto, staking crypto, selling, swapping/spending crypto you’ve held for less than one year if the gain is more than €600 are potential taxes you can still pay. 
3. Belarus – Major crypto transactions like staking, mining, and swapping, are excluded from tasks in this country, and they are not included in income tax and capital gains tax.

Frequently Asked Questions

How Do I Determine the Value of Cryptocurrency for Tax Purposes?

When it comes to tax purposes, the value of cryptocurrency is typically determined using the fair market value at the time of the transaction. Reputable cryptocurrency exchanges or market data providers can be used to obtain this information. It’s worth noting that some tax authorities may offer specific guidelines on how to determine the value of cryptocurrency, including recommended valuation methods.

Would CBDCs Be Classified as Taxable Crypto?

CBDCs are fundamentally viewed as fiat, with little difference as they use the distributed ledger technology on the blockchain. Since they were issued by central banks, they are different from decentralised cryptocurrencies like Bitcoin or Ethereum. CBDCs are typically controlled and regulated by the central bank or government, which may have implications for their tax treatment. While the precise tax classification of CBDCs may differ across jurisdictions, they are often treated similarly to traditional fiat currencies.

How Would These Taxes Be Deducted From Each Portfolio?

This would be done on-chain following each portfolio’s tax reporting requirement. This, together with gains gotten from capital forms the source of the taxes to be deducted and this is simply you selling or exchanging cryptocurrencies for a profit, it typically triggers a capital gains tax event. Since crypto taxation is still in its development stage and it varies in diverse jurisdictions. This also defines how each crypto tax would be deducted.