Breaking Down Cryptocurrency Taxes, Rules, and Regulations

In most countries around the world, cryptocurrencies like bitcoin are treated as investments and therefore are subject to capital gains taxes. In this guide, we explain how cryptocurrency taxes, rules, and regulations work in a variety of countries. 

Cryptocurrency Taxes in the United States

The IRS (the tax collecting agency of the U.S.) classifies cryptocurrencies as property for tax purposes.

Other forms of property in the U.S. include stocks, bonds, and real-estate. The tax implications of cryptocurrencies look very similar to the tax implications of these traditional assets, in that capital gains rules apply.

When you dispose of property, you incur a capital gain or capital loss on the transaction. Capital gains and losses from your cryptocurrency trades or sales need to be reported on your tax return at the end of the year on IRS Form 8949.

Example

John purchases 1 bitcoin for $10,000. Two months later, John sells his bitcoin for $12,000. In this scenario, John realizes a $2,000 capital gain. This gain must be reported on John’s tax return, and he will pay a certain percentage of tax on that gain depending on what income tax bracket John falls under for the year. 

Crypto Losses

Alternatively, if you lose money when disposing of your crypto via selling or trading, you incur a capital loss, not a gain. Capital losses actually reduce your taxable income for the year and thus lower your overall tax liability.

As a result, it’s smart for crypto investors to carefully file their crypto investment losses with their tax return as it saves them money.

For a detailed look into more U.S. crypto tax rules, checkout this guide: U.S. Crypto Tax Guide.

Cryptocurrency Taxes In Canada

The CRA (Canadian Revenue Agency) treats cryptocurrency like a commodity for tax purposes. Depending on whether you are operating as a “business” or as a “hobby”, the cryptocurrency income that you generate from trading or investing will be taxed differently. However, all forms of cryptocurrency income are taxable.

If generated from business activity, 100% of the income is taxable. On the other hand, if just operating as a hobby, the income will be treated as capital gains and only taxed at 50%.

When Do you Need To Report?

Similar to rules in the U.S., you need to report your crypto income whenever you dispose of a crypto asset. A disposition simply refers to ‘getting rid’ of something, and the CRA defines a crypto disposition as any of the following:

  • sell or make a gift of cryptocurrency
  • trade or exchange cryptocurrency, including disposing of one cryptocurrency to get another cryptocurrency
  • convert cryptocurrency to government-issued currency, such as Canadian dollars
  • use cryptocurrency to buy goods or services

Any time you carry out one of these actions, you dispose of a cryptocurrency and incur gains or losses income. 

Finally, unlike the U.S., the CRA uses the Adjusted Cost Basis method for calculating gains and losses from your crypto dispossions. In the U.S., it’s common to use First-in First-out (FIFO).

The Adjusted Cost Basis Method (ACB) uses the total average cost (in CAD) of each unit of that cryptocurrency at any given time, rather than the specific cost of a single crypto.

Cryptocurrency Taxes in Australia

The Australian Tax Office (ATO) has released a complete set of guidance on how it handles the tax treatment of cryptocurrencies like bitcoin.

Just like the U.S. and Canada, capital gains taxes apply whenever you dispose of your cryptocurrency.

Your capital gain is simply the difference between the AUD value that you acquired the cryptocurrency at and the AUD value that you disposed of the cryptocurrency at. 

Record Keeping

In Australia, you are required to keep records of your dispositions of crypto assets for five years after the event occurs. 

Cryptocurrency Taxes in the UK

HMRC (Her Majesty’s Revenue and Customs) has started to enforce cryptocurrency tax reporting rules more aggressively in recent years.

The income generated from investing, trading, and selling cryptocurrencies like bitcoin are subject to UK capital gains taxes.

Contrary to the U.S. and other countries, you don’t pay any taxes on your first ~ £12,000, known as the annual exempt amount.

Same Day and Bed & Breakfast Rule

One large difference with rules in the UK have to do with accounting for your sales of cryptocurrencies. 

Both the “Same Day” and Bed & Breakfast Rules apply to ensure that you aren’t selling cryptocurrencies solely to take advantage of unrealized losses and thus reducing your tax liabilities artificially.

The Challenge For Traders

Doing the necessary gains and losses calculations so that you can report each one on your taxes can be a tedious and challenging process for traders who have been trading across multiple cryptocurrency exchanges and platforms.

In addition, most crypto trades are quoted in other cryptocurrencies—not in fiat—which makes gains and losses calculations even harder as investors need to track down the historical prices of their cryptocurrencies at the time of the trade in their country’s fiat currency.

As a result of this challenge, many investors are leveraging cryptocurrency tax software tools like CryptoTrader.Tax to automate all of the gains and losses tax calculations.

Zignaly and CryptoTrader.Tax Partnership

CryptoTrader.Tax is the leading cryptocurrency tax software platform used by tens of thousands of individual crypto investors all over the world. The CryptoTrader.Tax platform allows users to connect their cryptocurrency exchanges and wallets to their account and generate necessary tax reports based on their historical data.

Zignaly and CryptoTrader.Tax have officially teamed up to make cryptocurrency tax reporting as easy as possible for users. As a result of this partnership, Zignaly users qualify to receive 20% off all CryptoTrader.Tax reports with checkout code ZIGNALY.

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