Crypto investors often lack the information they need regarding cryptocurrency and taxes. This is primarily related to the fact that crypto tax guidance generally is far behind crypto innovation. But as the industry expands and regulators weigh in, it's essential for crypto traders to have an understanding of how cryptocurrencies are taxed.
Disclaimer: Quadency does not provide tax advice. The regulatory framework for taxation of cryptocurrencies differs from country to country and we strongly advise you to contact your personal tax advisor for further information about your personal tax circumstances.
Crypto Tax Summary
- Many regions require tax reporting for capital gains on crypto.
- Regulations vary widely across global jurisdictions from complete bans to zero taxes.
- Tax guidance may depend on the type of crypto, the transaction amount or other factors.
- Calculating cost basis is the key element in determining gains and losses.
- Crypto loss can in some instances be used to offset gains.
How crypto is taxed globally
Different regions of the world look at cryptocurrency taxation in varying ways:
By type of crypto asset: Different types of crypto, such as DeFi interest earned, airdrops, utility tokens, staking rewards, crypto payments, and mined tokens may have varying regulations depending on the region.
By transaction type: Crypto to crypto transactions, fiat to crypto, and crypto to fiat are not taxable in the same way. For instance in France, crypto to crypto transactions and holdings are not taxable events but crypto to fiat transactions are.
By profit size: The US requires reporting for $10 or more in gains, but taxes apply when gains are over $600. The UK requires tax payments on gains over £12,300.
Germany only taxes crypto when profits exceed 600 Euros. Portugal imposes zero taxes on crypto capital gains. France treats cryptocurrencies as “movable investments” and gains are taxed as ordinary income with the amount of tax paid determined by whether or not you're a professional trader.
In the UK, cryptocurrency is taxed in one of two ways: If you are earning crypto, it’s taxed as income is taxed. Crypto buys, sells, swaps and spends are subject to capital gains tax. Capital gains tax events occur when you dispose of your crypto, meaning that gains made by adding/removing assets from a liquidity pool and staking through a DeFi protocol may also be taxed as capital gains.
In the US, crypto is regulated as property so all capital gains/losses over $10 must be reported. If your taxable income is less than $40,400 annually, you do not have to pay any capital gains taxes but must still report them. Recent legislation will soon require US crypto exchanges to issue tax documentation but only for users who made $600 more in profit. Others are still required to report but must calculate it themselves.
In Canada, cryptocurrency is treated as a commodity so gains and losses need to be reported for crypto sells and buys. Canadians are subject to capital gains tax or, in some cases, business income taxes, when they sell or mine crypto. If taxed as gains the rate is 50%; when taxed as income the rate is 100%.
Asian countries vary wildly in their crypto taxation policies. China, for instance, has placed a complete ban on cryptocurrency transactions. On the other end of the spectrum, crypto-friendly Singapore breaks down crypto into 3 categories: utility tokens (no gains tax), payment tokens (no gains tax), and security tokens (gains tax). South Korea requires gains of over $2.5 million to be subject to a 20% tax.
El Salvador is a unique case because it’s the first country in the world to legalize BTC as a legal tender. Bitcoin transactions are thus exempt from capital gains taxation but rules regarding altcoins and mining remain unclear.
How to calculate “Cost Basis” for crypto gains
In order to pay your crypto taxes, you'll first need to figure how much you received in capital gains (or losses). To this you’ll need to determine the “cost basis”, which is how much profit you made between the buy and the sell/trade.
Cost basis = Purchase price (price paid when acquired) + Purchase fees.
Capital gains = Proceeds (price when sold) - Cost basis
For example, you purchased an NFT for $10,000 and paid $100 in gas fees plus a 2.5% platform fee.
Your cost basis would be: $10,000 + $100 + $250 = $10,350
Say a few months later (decades in crypto time!) you sell the NFT for $25,000 (including transaction/network fees).
Your capital gains will equal: $25,000 (proceeds) - $10,350 (cost basis) = $14,650.
Calculating crypto losses
Remember, in some circumstances, you may be required to report capital losses, such as when you want to use losses to offset present and/or future capital gains. You calculate losses the same way you would with gains only the amount will be a negative.
For instance, if you bought 10 Solana tokens at $250 (yikes during peak hype!) your cost basis would be $2500 (minus transaction/network fees).
If you sold your Solana tokens a few years later at $150 each, you would calculate your losses by taking the cost basis ($2500) and subtracting the proceeds ($1500) for $1000 in capital losses.
Crypto tax software and tools
Because crypto markets are so open, vibrant and rapidly evolving, most crypto enthusiasts have multiple trading accounts, wallets, and types of digital assets. Assembling the cost basis for all your crypto trades, investments, transfers, and transactions can become very challenging for active traders and investors. Luckily, tools are emerging to bridge that gap, such as:
- Quadency’s dashboard enables traders to determine the cost basis for trades made across their portfolio in one unified view.
- Gain - Loss Calculators like at BabyPips or FEH.im are great tools to have when managing your crypto asset portfolio.
- Subscription transaction trackers like CoinTracker, Koinly and TaxBit offer software that aggregate all your crypto transaction histories across exchanges and wallets. They also track compliance and enable traders to “tax-loss harvest” to anticipate and manage capital gains using automated strategies. Some of these trackers offer a free limited plan or first free month.
- Fully free tracking software is offered by companies like CoinPanda and Tax.Crypto to provide free crypto transaction aggregation and reporting to worldwide users.
Crypto innovation moves much more swiftly than policy makers and regulators. cryptocurrency traders wanting to be tax compliant and legal across the board must be informed and arm themselves with the best tools available in order to participate in crypto trading without the risk of agency enforcement.
- Easily determine your cost basis in Quadency’s smart terminal
- Beginner’s Guide to Crypto Exchange Fees
- Discover QUAD tokens and start staking!
Quadency is a cryptocurrency portfolio management platform that aggregates digital asset exchanges into one easy-to-use interface for traders and investors of all skill levels. Users access simplified automated bot strategies and a 360 portfolio view with a free account.
Disclaimer: The content of this article is for general market education and commentary and is not intended to serve as financial, investment, or any other type of advice.