Last Updated on August 9, 2023 by Olga
Cryptocurrency and taxation may sound incompatible: decentralized digital currency was inspired by libertarian ideas and the wish to minimize government and bank influence in finance. However, 11 years after the Bitcoin creation, we have a crypto market that is subject to regulations and even taxation. This might have been a nightmare for the early crypto adopters, but from today’s point of view, looks like a thing to bring much good to the community. How is that possible? And how to understand if you have to pay any crypto taxes? Find the answers below!
Should I pay any crypto taxes?
First of all, that depends on your jurisdiction. Many countries have established strong crypto regulations and taxation, while others still struggle with defining the legal and fiscal status of Bitcoin. To cover both categories, we will consider the crypto taxation policy in the USA, Great Britain, and India. However, if you are from a different country, don’t skip this paragraph — here, you will gain a basic understanding of what crypto taxation looks like and the way it is applied.
United States
If you are an American taxpayer, you are required to report gains and losses from each of your crypto transactions. In 2021, the Internal Revenue Service will ask you in Form 1040: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Interestingly, the IRS treats cryptocurrencies as property, not as a currency.
Here are the events to report on:
- Earning crypto. Whether that be a job, mining, staking, airdrop, or interest from Bitcoin lending — if you’ve got any income in crypto, you are liable for income taxes.
- Selling crypto for cash. This is a way to realize the gain on your crypto property — quite a taxable event in the eyes of IRS.
- Paying for goods or services; buying one crypto with another. Another way to profit from your crypto earnings — and gain attention from the IRS!
No tax is paid for these crypto activities:
- Buying and HODLing crypto. Great news for the long-term crypto investors! You’re not liable to tax in the case of buying and hodling Bitcoin or other cryptos unless you sell them to make a profit. In case you do, this will be treated as getting income, which is subject to taxation today.
- Transferring crypto between wallets. No new profits generated here = no taxable event has been triggered.
If you trade on major crypto exchanges, you might have seen the options of collecting data for your tax authorities. These make it easy to track how much of your income is liable for taxation. Let’s say, if you bought 1 Bitcoin at $16,000 and then sold it for $26,000, you would incur a $10,000 capital gain. The sum of money you’d need to pay as tax here depends on your tax bracket. The tax for $10,000 will be added to the total taxation amount you have.
And here’s the good news: if you lost money on your trading, the losses will be deducted from your income this decreasing the final tax size.
Great Britain
Same as the USA, Great Britain views digital assets as property. If you trade cryptocurrency, your gains are subject to taxation, while losses can reduce your taxable earnings. Here’s what’s different:
- HODLers have to pay taxes. It’s 10% even if you aren’t actively trading your Bitcoin.
- You’re free from taxes if your net crypto income is below 12,500 GBP. If it’s above, from 20% to 45% have to be paid depending on your tax bracket.
India
Cryptocurrency was legalized in India in 2020. Yet, not enough time has passed for the authorities to establish any clear guidelines for crypto income declaration. “Income from Other Sources” is the category that Indian exchanges recommend their users to choose when classifying their crypto earnings.
While the Indian government is reportedly planning to impose a 30% tax on cryptocurrency, the exact fiscal status of crypto remains unclear. Spheres that are supposed to be subject to future taxation include mining, selling crypto for cash, buying goods and services, and more.
Do I have to pay a tax when I take out a loan in crypto?
Irrespective of your jurisdiction, the short answer is: no, you don’t.
If you do crypto lending yourself, you will be liable for taxation on the amount you earn. While cryptocurrency lending may be quite a lucrative activity, this is mostly a part of the DeFi sector. At CoinRabbit cryptocurrency lending platform, here’s what we can explain to you as a borrower: IRS hasn’t issued any clear guidance on crypto loans taxation yet. The Service is basing its work on the frameworks from 2014, which is like forever ago for the crypto industry — there were barely any crypto loans back at that time. While we are to expect the new regulations, crypto loans don’t seem to be a thing to declare.
What do the crypto enthusiasts think about taxation in crypto?
As you may guess, many cryptocurrency adopters are very skeptical about any government participation in the crypto industry. This does not only include taxes but any regulation in general.
However, we seem to be still far from a world where genuine peer-to-peer governance could be combined with wide adoption. Lack of regulation in crypto lead to the unprecedented spread of scams in the ICO boom in 2017, and the same pattern seems to be repeating for the current DeFi craze.
This undermines trust in crypto from the institutional investors and all those who can drive the really wide adoption of digital assets. And inversely, higher regulations rate and taxation make the market more trustworthy and transparent.
Whatever the case, the crypto loans’ taxation definition and framework haven’t been developed yet — and this is a great chance to enjoy borrowing without having to worry about any tax. Secure custody resistant to hacks, no credit checks, no monthly payments, and limitless loans at 50% loan-to-value — borrow stablecoin USDT or USDC at CoinRabbit and start fulfilling your dreams now!
