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?
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.
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.
Here’s a handy Bitcoin Tax Calculator.
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.
There is no VAT applicable to Bitcoin transactions.
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).
As for wealth tax, cryptocurrencies have to be declared as you would declare any other asset that you own. 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.
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.
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.
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.