Cryptocurrencies as an asset class are a very new thing in general, having only existed for a few years. Governments around the world are still learning about them and subsequently enacting regulations and laws governing them.
One big question that many cryptocurrency investors are sure to have is this: How will my cryptocurrency holdings be taxed?
This is the question I’ll be tackling in this article. If you would like to read more about Bitcoin before, check out my guide to investing in Bitcoin and other cryptocurrencies, as well as my list of crypto resources.
If you already know how your country taxes Bitcoin and you just want to find a way to quickly prepare your taxes, I strongly suggest you take a look at Cointracker. This is a service that only tracks your crypto portfolio across various exchanges and cold storage devices, but can also prepare your taxes for you in a few minutes. If you do any trading or use bitcoin for payments this is an essential tool as you will have many transactions to record for tax purposes, and you can’t afford the possible mistakes that come from the tedious manual work of calculations.
Cointracker is the service I use and recommend, I’m sure it will serve you well. Another alternative is Cryptotrader. Now let’s carry on with the explanations.
Cryptos only exist in a digital, virtual form and do not have any physical form. They can be used to make payments for goods and services, although no government has so far actively encouraged their use as an alternative currency. They are also popular as a store of value and for speculation, lending and trading purposes.
Cryptocurrencies are initially ‘mined’ but could subsequently be bought, exchanged, awarded, or granted. They do clearly meet the definition of an asset.
For tax purposes, the mining of cryptocurrencies is usually taxed in a similar way to the production of any other service. But what about when cryptos are bought and held as an investment? Where and how are they recorded on a company’s balance sheet?
Cryptos do not meet the accounting definition of cash as they are not legal tender, having not been issued or backed by any government or state.
Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cryptos do not fall under this category either, as their value tends to vary widely from one day to the next. Moreover, there is only one party to a cryptocurrency, while investments that fall under this category involve two parties by their contractual nature.
Properties, Plant and Equipment or Investment Properties refer to physical assets, so we can eliminate cryptos immediately from this categorisation.
Inventories are assets that are held for sale in the ordinary course of business or used in the process of production for such sale. Cryptos can’t easily be put into this category unless perhaps if the holding of cryptos is purely for the regular trading of said assets.
Intangible assets are identifiable non-monetary assets without physical substance. They have three properties:
- without physical form.
This category acts as a catch-all category for all non-financial assets without physical form, and therefore is the most suitable categorization for cryptoassets, at least until a better category is invented and agreed upon within international accounting standards.
Therefore, the general principle that many countries seem to be moving towards is that of treating cryptocurrencies as “intangible property.” Investors and traders holding cryptocurrency as a capital asset should, therefore, use capital gain or loss tax treatment on sales and exchanges, with the realization method.
For example, if you buy Bitcoins with U.S. dollars and later sell them for U.S. dollars, a capital gain or loss needs to be reported on that transaction.
- For tax purposes, cryptocurrency is property, not currency.
- Unless you are in the business of selling cryptocurrency, the gain or loss from any sale of cryptocurrency is capital gain or loss, similar to stocks, bonds, and mutual funds.
This means that using Bitcoin and other cryptos for payments makes it a huge hassle to deal with come tax time. Whenever you use Bitcoin to buy something online or offline, you are essentially making a trade. It doesn’t matter whether you receive fiat currencies in return or goods and services.
If you bought 1 Bitcoin at $100 and then you used that same Bitcoin to buy a car when the value of Bitcoin was $2500, you will need to declare a gain of $2400 to your government.
This might not seem too bad, but consider if you are using Bitcoin for daily transactions like groceries, Amazon purchases etc.
By the end of the year, you might have hundreds or thousands of small purchases, and you will need to calculate the gain or loss on each of those “trades”.
Another important question to tackle is how is bitcoin taxed when it is used as a means of receiving payments. Let’s say you are a consultant and clients pay you in bitcoin.
What you need to do in this case is to keep a note of the exchange rate on the day you received the payment, between bitcoin and your working currency. So if you received one bitcoin and the exchange rate on the day was 1 bitcoin = 5,000 euro, you will declare an income of 5,000 euro to your country’s tax authority.
Intangible assets are recognized initially at cost. Amortization is accounted for unless the intangible asset is deemed to have an infinite lifespan. Cryptocurrencies do have indefinite useful lives and would therefore not be amortized. After the initial purchase, an entity can choose to subsequently measure them at cost or at fair value. If the entity was a Bitcoin trader it would make more sense to subsequently measure its Bitcoin at fair value through profit or loss. In most other cases they’d be measured at cost less any impairment.
However the Bitcoin is accounted for, the entity would be prudent to make appropriate disclosures if its holdings were material or if it had a significant volume of Bitcoin-denominated transactions. It would also be prudent to contact the tax entity of the country of incorporation to seek clarification.
Until further clarification and guidance from governments, cryptocurrencies/cryptoassets appear to meet the definition of an intangible asset: identifiable as can be sold, exchanged or transferred individually; not cash and non-monetary asset; have no physical form.
Here are some links to countries that have taken an official stand on the classification and taxation of cryptocurrencies:
United States of America
- Read: IRS Notice 2014-21
The IRS guidance considers bitcoin as property and not a currency.
That’s good news for taxpayers with huge gains on using, investing or trading bitcoin. Since it receives capital gains treatment, if they held it over one year, the lower long-term capital gains tax rate applies.
Conversely, it’s bad news for those with large losses. According to the IRS guidance, bitcoin does not receive Section 988 ordinary loss treatment, which is unlimited; instead, it’s capital-loss treatment is limited to $3,000 per year.
The IRS guidance stresses a point — widely overlooked by many taxpayers — that using bitcoin to purchase an item or service triggers capital gain or loss recognition reflecting appreciation or depreciation of bitcoin. Compare the market price on the date bitcoin is used to make a purchase vs. the market price on the date you acquired that bitcoin, and the difference is a capital gain or loss on property.
Use FIFO when calculating profits or losses. This is the most conservative method, as FIFO is generally the least pro-Taxpayer of the methods. It’s hard to see the IRS issuing future guidance that would be less advantageous than FIFO.
In its formal Revenue & Customs Brief, published on Monday, the HMRC pointed out that for VAT purposes bitcoin and other digital currencies will be treated as follows.
- Income received from bitcoin mining activities will generally be outside the scope of VAT. This is due to the fact that mining does not constitute an economic activity for VAT purposes, as there is an insufficient link between any services provided and any consideration received.
- Income received by miners for other activities, such as for the provision of services in connection with the verification of specific transactions for which specific charges are made, will be exempt from VAT under Article 135(1)(d) of the EU VAT Directive as falling within the definition of ‘transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments.’
- When bitcoin is exchanged for Sterling or for foreign currencies, such as Euros or Dollars, no VAT will be due on the value of the bitcoins themselves.
- Charges (in whatever form) made over and above the value of the Bitcoin for arranging or carrying out any transactions in Bitcoin will be exempt from VAT under Article 135(1)(d) as outlined at 2 above.
With VAT out of the way, the HMRC turned to Corporation Tax, Income Tax and Capital gains Tax. It is important to note that there is no clear rule that applies to all activities and organisations. The brief explains:
“Each case will be considered on the basis of its own individual facts and circumstances. The relevant legislation and case law will be applied to determine the correct tax treatment. Therefore, depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable.”
Businesses which accept payment in bitcoins will see no change in the way revenue is recognised and how taxable profits are calculated:
- Corporation Tax: The profits or losses on exchange movements between currencies are taxable. For the tax treatment of virtual currencies, the general rules on foreign exchange and loan relationships apply. We have not at this stage identified any need to consider bespoke rules.
- For companies, exchange movements are determined between the company’s functional currency (usually the currency in which the accounts are prepared) and the other currency in question. If there is an exchange rate between Bitcoin and the functional currency then this analysis applies. Therefore no special tax rules for Bitcoin transactions are required. The profits and losses of a company entering into transactions involving Bitcoin would be reflected in accounts and taxable under normal Corporation Tax rules.
- Income Tax: The profits and losses of a non-incorporated business on Bitcoin transactions must be reflected in their accounts and will be taxable on normal income tax rules.
- Chargeable gains – Corporation Tax and Capital Gains Tax: If a profit or loss on a currency contract is not within trading profits or otherwise within the loan relationship rules, it would normally be taxable as a chargeable gain or allowable as a loss for Corporation Tax or Capital Gains Tax purposes. Gains and losses incurred on Bitcoin or other cryptocurrencies are chargeable or allowable for Capital Gains Tax if they accrue to an individual or, for Corporation Tax on chargeable gains if they accrue to a company.
Further resource: Excellent PDF about all aspects of cryptocurrency and its treatment in the UK.
In Europe, at least for the moment, the treatment of cryptocurrencies for regulatory and tax purposes has largely been determined by a decision of the European Court of Justice.
In October 2015, ECJ stated that bitcoin represents a means of payment and its exchange should therefore be exempted from VAT. According to the ruling in the Skatteverket v Hedqvist Case C-264/14, the exchange of bitcoin falls within the exemption in Article 135(1)(e) of EU’s VAT Directive, which covers transactions concerning currency, bank notes, and coins used as legal tender.
The Blockchain Island, a.k.a. Malta, has enabled a regulatory platform for distributed ledger technologies (DLT) with the objective of providing investors and users with some form of stability. On 1st November 2018, Malta buttressed this platform with three sets of fiscal guidelines, bringing clarifications and with them certainty, as to the tax implications of using Malta as a DLT base.
The tax treatment of transactions involving coins like Bitcoin would be identical to the tax treatment of transactions involving fiat or conventional currency. As such, coins fall outside the scope of income tax and duty, and gains on isolated transfers will not be taxed in Malta.
Conversely, where the Coins are transferred as part of a coin exchange business or trade, profits realised from such business would be taxed at the standard Maltese corporate income tax rate of 35%. By the application of structuring options which are available under the Maltese full imputation system, the effective tax rate on such trading income could be reduced to between 5% and nil. The exchange of coins for other cryptocurrencies or for fiat money where such exchange constitutes a supply of services for consideration will not be liable to VAT. Mining would also fall outside of scope of VAT, unless it is carried out against payment of transaction fees.
With respect to the determination of a coin’s value, the guidelines provide that this should be established by reference to the rate published by the relevant Maltese authorities, and where such is not available be reference to the average quoted price on three reputable exchanges, on the date of the relevant transaction or event, or such other methodology to the satisfaction of the Commissioner for Revenue.
- Innovative Technology Arrangements and Services Act, 2018 (ACT No. XXXIII of 2018)
- Virtual Financial Assets Act (ACT No. XXXIII of 2018)
The Portuguese Tax Authority (PTA) has officially announced that Bitcoin and other cryptocurrencies will not be taxed in Portugal.
This means that individuals won’t have to pay capital gain taxes or VAT, when buying or selling crypto.
Portuguese tax agents elaborate that income generated by trading can fall in three different categories – capital gains (G), capital income (E) and corporate or professional income (B). Category G covers the sale of securities, financial derivatives, certificates whose holders can receive value from an underlying asset, and some other instruments. However, as legislators have chosen to adopt a closed definition, tax can be levied only on the items mentioned in the law, and cryptocurrencies are not in the list. Digital coins do not fall in category E, either, which pertains only to income generated from capital investments.
If applicable, category B prevails over the other two. Income in this category is taxed based on the exercise of an activity and not according to its source. Portugal’s tax code states that if this is an activity oriented toward profit making, the taxpayer is obliged to issue invoices whenever they sell a product or provide a service. The tax agency then draws the conclusion that the sale of cryptocurrency is not taxable under the current tax legislation unless it constitutes a taxpayer’s professional or business activity, in which case it will be taxed in category B.
Portugal does not tax the increase of value of any currency nor the gain on the sale of any currency. Obviously, any currency losses may not be offset against any gains either.
There is no VAT applicable to Bitcoin transactions. That means that the purchase of Bitcoin is treated differently from the purchase of normal products. If the seller is handing over Bitcoin to me in return for cash, he does not need to charge VAT on that sale.
As a side note, keep in mind that the European Union (and hence Spain) considers cryptos like Bitcoin as a method of payment. In Spain this has been officialised in 2015. Therefore, if you are purchasing something from a shop (say a laptop) and you are making the payment in Bitcoin, VAT would still be applied. In practice, if the laptop costs 1,000 euro and the VAT due is 200 euro, what you would do is take the sum of 1,200 euro and convert that to the equivalent in Bitcoin at the time of payment. That will be the amount of Bitcoin you transfer to the shop in return for the laptop. As you can see, VAT has been paid because it is a normal transaction, with the only difference that Bitcoin is being used instead of Euro.
Trading in cryptocurrencies is considered in the same way as forex trading or binary options. The same principles will apply come tax time. The savings tax rates are applied (on a scale between 19% and 23%).
You might read on some websites and forums that if you buy and sell bitcoin within a one year span then the gains would fall under the normal tax brackets for general income, whereas if you wait more than a year before you sell, they will fall under the savings rates (typically more beneficial as they are much lower). This was correct only for 2015 and previous years. Since 2016 all capital gains are taxed equal regardless of the generation period of them.
Article 37.2 of the Personal Income Tax Law, establishes the FIFO method (First In, First Out) for calculating gains on cryptocurrencies.
An interesting question arises if you trade a cryptocurrency to/from bitcoin without transferring to Euro at any point; would that still be a taxable event? In theory yes, as you are changing assets and Spanish Tax Law only allows the change of specific financial assets without taxation in certain cases expressly established by law (certain investment funds). But in practice, at least for now, it is impossible for the Tax Administration to determine a taxable capital gain when there is only trading with cryptocurrencies. Also, in the absence of any specific criteria established by the tax administration, it can be interpreted that the capital gain is effected when the cryptocurrency is sold into a FIAT one. There are also other interpretations regarding, for example, this trade between cryptocurrencies must be taxable as permute of assets (article 37.1h Tax Income Act – Capital gains would be Taxed between the difference of the market value of each asset). The videos below describe why it makes sense to pay tax on the transfer from one crypto token to another.
You can compensate your yearly profits by the losses of that year and the past 4 years. If it’s the first time you are making a loss, you can offset that loss (up to 20% of it) with returns from real estate capital investments. If that’s not enough, you can offset it with profits made in the next for years.
When you receive an airdrop, as in the case of Bitcoin Cash, the theory is that you need to pay tax on the gains from that event. Say you receive an airdrop of 10 Bitcoin Cash, then you will take the value of the Bitcoin Cash at the date of the airdrop, and pay tax on that value, since you went from 0 to the total value of that airdropped Bitcoin Cash.
In practice, I’m pretty sure the vast majority of most holders will not declare these airdrops. The main reason will not be because they actively want to evade taxation, but purely a question of not even knowing that they have airdropped tokens that they can access. In fact, there are dozens of airdrops that happen very frequently, so it would be close to impossible to understand how many tokens you have, when you received them, etc etc. We need to keep in mind the fact that what people hold are the private keys, which in turn give them access to funds on the different blockchains out there. It’s quite different from other financial instruments which are typically closely tied to your name, say bank accounts of shares held at a broker.
What most people will undoubtedly do is to treat the airdrop as a value of 0 and only declare capital gains if they eventually obtain that airdropped crypto and actually sell it. This is the option that makes most sense in my opinion.
Capital gains tax in Spain is established within the following parameters:
- Up to €6,000 = 19%
- €6,000 – €50,000 = 21%
- €50,000 upwards = 23%
As for wealth tax, cryptocurrencies have to be declared as you would declare any other asset that you own. The minimum amount below which you don’t need to pay any wealth tax varies from one autonomous region to another. Aragon sets a lower exempt limit of €400,000 while others set a higher limit of €700,000, and Madrid has an effective wealth tax of 0%. You need to declare the value of your crypto tokens on the 31st of December of the previous year. You can use a reference site like CoinMarketCap to get the value of the crypto tokens on the 31st of December at 00:00.
As for the modelo 720 (declaration of foreign assets), the categories of assets that should be included in the 720 do not specifically name cryptocurrencies, nor assets that could be assimilated, thus there is space to defend that cryptos, as they are not explicitly included in the 720, should not be declared. In any case, if you reside in Spain and hold your cryptocurrencies in an offline wallet, you would not need to declare them on this form under no circumstance as they are not located outside of Spain. Indeed, even if they were held at a broker, Bitcoin does not lend itself to the concept of geographical location, so it would be hard to prove that they are actually held in some country, hence modelo 720 declarations would probably still not need to be made. We await an official verdict from the tax department on this matter, but in the meantime this is what most accounting firms and tax consultants are saying.
Check these very informative videos on the treatment of Bitcoin within the Spanish tax law (in Spanish only):
Taxation of Crypto mining:
General info on taxation of crypto profits:
More info and dealing with certain questions:
Info on airdrops like Bitcoin Cash:
Bitcoin transactions in Germany have been made exempt from capital gains tax after one year. In Germany, assets such as stocks and bonds are subject to a 25% capital gains tax (plus a solidarity surcharge) and a state-dependant church tax. With the new decision, bitcoins having been held for more than a year will not be subject to these charges.
If a private trader sells their bitcoin more than a year after its purchase, the profit is exempt from capital gains tax. The same applies to annual profits of less than €600. That means keeping digital coins in Germany will actually save you money. And regardless of how much profit you make when you sell the cryptocurrency after hodling for over a year, you don’t owe the state any tax on your gains.
According to German news site Die Welt, financial expert Frank Schaeffler stated: “It is good that investment in bitcoins is finally [a] legal certainty. Private profits from the sale of bitcoins are tax-free after one year”.
It is also worth noting that the German capital gains tax does not apply to mining bitcoins. It only applies to stocks, bonds, etc, that have been purchased with the intention of market speculation. Since mining bitcoins is essentially creating value, normal income tax would be applied.
In 2018 the Council of State, the national government’s body charged with providing the executive branch with legal counsel and acts as the supreme court for administrative matters, was approached by various taxpayers disputing the instituted regimen relating to cryptocurrency tax rates.
Under the former cryptocurrency regulation that dates back to July 2014, all gains from the sale of the digital currencies were considered to be commercial and industrial profits, and, as such, taxpayers were liable for a capital gains tax of 45%.
On April 26th, the High Administrative Court decided to support the group of taxpayers who had petitioned their grievances and lobbied against the tax plan earlier this year. Following the verdict, the Council of State was forced to reconsider the way in which profits from the sale of cryptocurrency are regulated, French media house Le Monde reported.
Now, profits made through the sale of digital currencies are classified under the moveable property category, so traders will be taxed at a flat rate of 19%. The new order does not entertain other social taxes.
The Council of State added, however, that if profits are generated from any other activity apart from the sale of cryptocurrency, such as mining, the transaction will remain subject to the first tax regulation. The 19% rate is designed explicitly for investment gains.
General Good Practice
Here are some good tips on how you should go about investing in cryptocurrencies from a tax perspective:
- Keep records of all your cryptocurrency activity.
- Periodically download your trading history from any exchanges you use.
- Export transaction logs from any wallets you have.
- Ensure you have records for each time you spend any cryptocurrencies.
The BitcoinTaxes FAQ, common questions and blog are among the best resources that deal directly with this topic. Most of the information is US-centered but a lot of it is also applicable to other countries.
Keep in mind that all this information was obtained through my personal research and discussions with friends and professionals in this space. This does in no way constitute official advice and you should always consult with a legal professional before taking any decisions with regard to tax declarations.