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Crypto tax is an ever-evolving field, with heavy consequences if you don’t navigate correctly. Here are three key insights that will help you make better decisions and avoid penalties.
It’s a well known story, but it is still amazing when you think about the implications. Talking about one of the most famous cases of tax evasion, when Al Capone—the most infamous gangster in American history—was untouchable to law enforcement until 1931 when the IRS tax authority stepped in. Though he had evaded successful prosecution for countless crimes, he couldn’t hide the money he had made. More to the point, he couldn’t hide the taxes he hadn’t paid. He was sentenced to 11 years in prison and fell from his position of power.
The implications, other than the obvious “don’t live a life of crime”, is that the tax authorities really don’t mess around. Is it any wonder that the TVA (Time Variance Authority) in Disney’s Loki are played off as a time-spanning group of government accountants? Ruthless, tireless, and seemingly all knowing. If you haven’t paid your taxes, don’t worry. You will. But if they have to track you down, you will pay your taxes, you will pay fines, and you could even go to jail.
What does this have to do with crypto? Well, everything. Because at this point in time the world of crypto is wild, untamed, and unpredictable. This can be thrilling, and for many of you, it is. There are fortunes to be made, and the field is accessible to almost anyone. But whether you have won big creating your own token, kicked off a successful ICO, or are a cautious investor hoping for a long term payoff, there are major tax implications for you. If you haven’t cashed out of investments you’ve made, there could still be tax implications for you. And even if you’d created value by developing a token, there could even be tax implications for you.
Hopefully, you’re much more aware now. But if you’re one of the few who have played in the crypto market, not set your taxes in order, and still somehow think it doesn’t affect you, just know this: Ignorance or lack of planning are never acceptable excuses for not paying your crypto taxes.
“This is fine.”
Three Insights to Navigating Crypto Taxes
1. Where you live matters. A lot.
Did you know that the US treats crypto investment similar to property or a capital asset? Did you know that in Belarus you aren’t taxed as an individual or business for crypto-related investments? And did you know that in Germany, as long as you keep your crypto investment for over a year it is tax free? Unless you are a company, in which case any gains are charged corporate income tax.
What is important to know is that where you reside, or at least to which country you owe your taxes, can make a significant difference in how beneficial your crypto investments are. We are finding that there are very different philosophies in how to treat crypto.
Some countries, like the US, view crypto as just another investment to be taxed. It fits into similar tax molds, and will generate a large amount of tax revenue, so why not keep it simple? Though even this attitude doesn’t work perfectly, as already there are legal battles being waged over the more unique features of crypto investment. Specifically, Joshua Jarrett, a cryptocurrency investor, is suing the IRS because he was penalized heavily for not paying taxes on newly created tokens. The current law states that even though the tokens hadn’t been sold, they have a market value and therefore have generated wealth. This is where crypto differs from more traditional stock investments, as the creation of tokens is more akin to creating a painting or growing crops, which are only taxes once they are sold and therefore given a market value. Tax experts have weighed in and stated that there is a case to be made for this distinction, and that the law may roll back if the lawsuit is successful. However, potentially billions in taxable tokens are up in the air until then, and are as of now taxable.
For other countries, such as Malta, Liechtenstein, and the Bahamas, crypto trading is seen as an opportunity to attract investors by strategically offering low taxes for crypto profit. These countries have been very forward about recognizing cryptocurrency as an emerging and valid market, and have been proactive about creating comprehensive regulation. This stability is very important to investors, as other countries have seen cryptocurrency become partially or completely illegal in the last 12 months, with no end in sight for crypto uncertainty. Instead, these countries have set simple guidelines for crypto taxation in a way that has already encouraged those seeking to get even more value from their crypto investments. Malta, for example, offers capital gain tax free treatment for long-held Bitcoin. It does treat other short term trading similar to stocks, taxing 35% on gains. However, there are various options for businesses to lower this rate considerably if they can strategically navigate the tax system successfully.
At the end of the day, it’s up to you to know what is taxed for your country, how it’s taxed, and what all you need to document to satisfy the legal requirements.
2. Different crypto activities have different tax implications.
Within each country’s tax code, it is further complicated by how the many different crypto activities are taxed. Though this varies widely, there are certain elements that need to be considered.
First, are you investing as an individual or as a business? There are a modest number of countries with favorable treatment for individual investors, but very few companies offer the same benefits to companies. Corporations often have tax burdens similar to other investments, be they stocks or even property in some cases.
Second, how long are you holding your investments? Many countries have different rules for “short term” vs. “long term” investments, usually defined as less/more than one year. Again, even this context depends not only on the country, but whether you are an individual or a business.
Third, how the crypto is used can make a difference. Some countries look at crypto trading as taxable events, where others have unique rules when crypto is used to make purchases for goods and services. And as mentioned above, some categories like mining or staking, have questionable implications even within the established tax law.
Just a few of the crypto law books, and many are already out of date…
3. All of this can change—at any time.
As if this wasn’t complicated enough, the real kicker is that even if you study your country’s law ad nauseum, there is no guarantee that the laws won’t change—sometimes with a whiplash effect—seemingly overnight. In researching the different crypto-related tax laws in different countries, it was shocking to see how many were established post 2018. However, cryptocurrency is relatively new as a mainstream investment tool, at least in terms of generating billions in economic growth, so while interesting, all these new tax laws weren’t a complete surprise. What was surprising though was how many substantial and policy changing laws were passed post 2018 that changed or even reverse crypto tax policy that had only been recently established. In the extreme cases there are a few countries that have outlawed cryptocurrency completely. More common, however, are laws that change direction on what types of tax treatments cryptocurrencies will incur. Germany passed a law in 2021 that eliminated the ability to succeed in derivative trading, as losses can no longer be deducted. Singapore, on the other hand, passed a law to exempt Bitcoin and cryptocurrency transactions from value-added tax (VAT.)
Where we go from here
What we are left with, in terms of crypto taxes, is a very complex and ever-changing landscape—no matter where you live. Given the challenges, is crypto even worth the trouble? Yes, of course it is. And the good news is, you don’t need to be a scholar in tax law to navigate. Here are a few tips:
- Before you jump in, talk to your accountant or do some research. If you’ve already jumped in, this is still a good idea. There may be a few key tax laws that will change your investment and trading strategy.
- Keep good records. Up until recently, this was incredibly complex for heavy traders or those who were active in exchanges. However, the crypto tax field is catching up quickly, and tools like CryptoTaxCalculator—my top pick for easy tax documentation and reporting—can help pull records from many different exchanges, across multiple years. This can quite simply rescue you from a world of tax penalties and pain, especially if you haven’t taken crypto tax seriously.
- Decide on how you plan to do your taxes. Once you have the documentation, you may feel confident enough to tackle the tax filing on your own (especially if you only have a handful of investments).
However, even if you’ve pulled your tax documentation from CryptoTaxCalculator, you can take the reports to your accountant so they can incorporate your crypto transactions in with the rest of your taxes. Having the reports compiled in a way that already sort out the relevant categories will help your accountant considerably, even if they aren’t well versed in crypto.
So breathe easier, and know that even though the world of crypto tax is complicated, there are some basic steps you can take to ensure you don’t run afoul of the tax authorities. Keep up with your tax responsibilities so you can truly enjoy your crypto earnings!
