Cryptocurrency taxation: The basic principles
As cryptocurrency owner or investor, I can imagine that you often discussed the usefulness of taxation. Cryptocurrency is first of all going against many beliefs of the current system, of which taxation is an essential part. In this article, I do not want to convince you of the usefulness of paying taxes. I also do not want to convince you of a popular idea that taxation is theft.
It is possible that you as a resident of your country are obliged to pay tax on all your income and / or your assets. This includes cryptocurrency. In this article, I want to go through the basic principles of taxation with you. I keep it at basic level, because type and amount of taxes can differ per country or even per state. However, by knowing the basics, you have sufficient general knowledge to understand what kind of tax you have to pay on your cryptocurrency.
Reason
As soon as cryptocurrency and taxes end up in one sentence, the question often asked is:
"Why should I pay taxes on my cryptocurrency?"
The answer to this can be very simple. If only part of your objective of investing or hodling cryptocurrency is to increase your own prosperity, it is advisable to declare your crypto and pay taxes on it. When you convert a cryptocurrency into fiat currency, it ends up in the “normal” payment system. If you want to make purchases of value with fiat currency in this system, this money must be obtained in a legitimate way and this includes that you paid taxes on the activities that helped you gain your wealth.
This is even more important if you believe your portfolio worth is too low to declare.
For example, imagine that your dream comes true and your specific cryptocurrency becomes 10,000x more valuable than it is now. Because the value of your shares is now suddenly high enough to buy nice things with it, you report it to the tax authorities. The first question an inspector will ask is: How did you obtain so much money. To which you answer that you bought this cryptocurrency when it was still 10,000x less valuable. The tax inspector will then conclude that you bought something in the past and made profit, but have not paid taxes on that profit.
And that readers, is the point that you run the risk of losing a lot more than you initially owed.
Taxation
There are various ways in which a state or country taxes an crypto investor. The most popular one being capital gains taxation. A capital gains tax is a tax on capital gains, the capital gains are the profit you realize when selling an asset for a value higher than the cost of obtaining such assets.
Many countries distinguish between short-term and long-term capital gains.
Where the short-term part is often taxed at a (much) higher percentage than the long-term percentage.
For example, in the United States the short-term capital gains are taxed at the same rate as ordinary income tax, which is up to 37% in 2018. The long-term capital gains tax rate is up to 20%. Short term (in USA) is selling your assets which you purchased less than one year ago, long term is longer than 1 year. It is extremely important to know when there is REALIZED capital gains tax. In some countries you only pay tax when you go back to fiat, but in America, for example, every crypto-crypto trade is also subject to taxation. It is often recommended to always make use of the fact that long-term capital gains taxation is less taxing in the end.
Examples of countries that use (a type of) Capital Gains Taxation: USA, UK, Turkey, Japan, France, Germany, Belgium, China.
Tips
Finally, I want to go over some tips to be in control of your taxation.
Research how your country identifies cryptocurrency. Not all countries are up to date with their taxation system, or have a special rule in place for cryptocurrency. However, if cryptocurrency classifies as asset in that country, it may fall under capital gains taxation even if it’s not explicitly stated.
Always keep your administration; this includes keeping evidence of transactions between your bank and an exchange, your mining rig invoices and pictures and keeping a download of your exchange history.A tool which I always advice to use to help with keeping your administration (and helping you calculate your capital gains tax) is: Cointracking
Make sure to calculate the taxes you need to pay. Reserve this amount, failing to do so, may result in having to cash out your holdings forcefully for a lower value than you initially had.
If your country allows capital gains loss deduction (like the USA), make use of it. Offset your losses from bad-trades with the profitable ones, so you lower your taxable gains.
if you feel that due to the amount of your capital a few percent can make a difference, consider consulting with a professional. They will help you with submitting and advising on taxes. I am personally available for general consultancy worldwide, I can provide full service in the Netherlands, where the tax rate is 1.6% of your capital.