Tue. Aug 20th, 2019

Bitcoin & cryptocurrency capital gains tax: essential trends to become aware of

This guide takes a brief look at the treatment of capital gains tax of bitcoin (and cryptocurrencies in general) across various countries, including the United States, United Kingdom, Germany, Sweden, Switzerland, Japan, China and Australia. 

The tax implications on cryptocurrency gains or losses very much depend on the country where you reside. As a generalisation, we are seeing the following tax trends emerge:

General Cryptocurrency Tax Trends

  • Different countries have different classifications for cryptocurrency e.g. certain countries will treat bitcoin (and cryptocurrencies in general) as ‘property‘ for capital gains purposes whereas others will classify bitcoin as ‘personal money‘ or ‘foreign currency‘;
  • Establishing whether certain transactions are taxable and how much tax to pay is often confusing for people. Therefore tax authorities are urged to to publish clear and simple guidelines;
  • Buying cryptocurrency in most countries is not taxable although holders are likely to become liable to pay tax when they profit by selling or even spending it;
  • Professional crypto trading: in general if you are trading cryptocurrency (holding it for short periods and making many trades) the tax authority may treat your gains as income. This means they may add the gains you made within the fiscal year towards your annual income and then apply income tax;
  • Crypto investing: typically if you are a buy-and-hold investor in cryptocurrency (holding for periods greater than one year) the tax authority may apply a straightforward capital gains tax to any realised profits. In certain countries you may even be exempt from paying capital gains tax;
  • Offsetting realised losses against realised gains: In certain cases, you may be able to deduct realised losses from your gains to lower your tax liability. This is generally the case when you pay taxes on cryptocurrency gains (and not applicable if you benefit from tax exemptions). Certain countries will even allow you to carry forward realised losses to offset against any future gains;
  • Deductible allowances: In certain countries you may be eligible for annual allowances that are deducted from your realised gains (within a tax year). Therefore, if the annual deductible allowances are greater than your gains you could end up paying no tax at all;
  • Reporting to tax authorities is mandatory: Tax authorities are becoming stricter about reporting your cryptocurrency wealth and are tackling tax evasion by approaching cryptocurrency exchanges and wallets for user information.

This guide is written as general information and has not taken into consideration your circumstances. Therefore, consult with a professional tax advisor before taking any investment or trading decisions; see disclaimer below.

UNITED STATES

Cryptocurrency capital gains tax in the US 

Tax Authority: Internal Revenue Service
Capital Gains Tax: Yes, if held for over a year a flat tax rate of 15% – 20% is levied on the gain. If held for less than a year income taxes will become applicable
Classification: Treated as property (assets)
VAT (sales tax): No 

Treatment of crypto gains 

The IRS acknowledges that cryptocurrency is a digital representation of value that functions as a store of value and is held as a medium of exchange for products and services as well as for investment.  

According to the  IRS’ official guidance on crypto taxation,  all virtual currency is treated (and is taxed) as ‘property‘ for Federal Tax purposes.

If you buy bitcoin or cryptocurency and hold it for over a year, you would be liable to pay long-term capital gains tax when you sell, which is typically levied at a rate that is between 15% and 20% depending on your level of income.  

The rate of capital gains tax is typically 15% on profits. However, if household income exceeds $479,000 (for married couples) or $425,800 (for individuals), then the rate of capital gains tax is 20%.  

Typically, if you held cryptocurrencies for less than a year, gains are taxed at your normal income rate. 

Treatment of crypto losses

Losses from cryptocurrencies can be used to offset capital gains from other types of asset classes, such as real estate and stocks.

An investor’s net loss (up to to $3,000) can be deducted against ordinary income. However, the annual limit that can be deducted from gains is $3,000. That means  it would take you 33 years to recoup a loss of $100,000, for instance, assuming an investor never had any additional capital gains and ended up only taking the annual $3,000 deduction against ordinary income.

The IRS is taking cryptocurrency taxation a ‘high enforcement priority‘, and has made it clear that all taxpayers must report sales of cryptocurrencies. 

As a matter of fact, it being reported that the IRS has already started sending letters to cryptocurrency investors, asking them to amend their tax filings and requesting others to pay back taxes (including interest and penalties).

The IRS is expected to release detailed crypto tax guidance to eliminate ambiguity. As always it would be sensible for you to speak to a specialised tax advisor about your individual circumstances.

UNITED KINGDOM

Cryptocurrency capital gains tax in the UK 

Tax Authority: Her Majesty’s Revenue & Customs 
Capital Gains Tax: Yes 
Classification: Mostly treated as property. If it is treated as property or investment then CGT of 10% applies (after deducting for allowances) and if it is deemed to be trading activity then you will be taxed as income
VAT (sales tax): No 

Treatment of crypto gains

In the UK, tax on cryptocurrencies is often decided on a case-by-case basis.

However, the HMRC recognises the importance of providing guidance and according to the policy paper published in December 2018, the HMRC considers cryptocurrencies as ‘property‘ for capital gains purposes. Therefore, anyone holding cryptocurrency as an investment is subject to capital gains tax of 10%. HMRC does not consider cryptocurrency to be fiat currency or money.

If the HMRC looks at the frequency of your trades and understands there is sufficient evidence to conclude that you have been trading (and not investing), then income tax will take priority over capital gains tax and will apply to profits (or losses).

Treatment of crypto losses

Any losses incurred on trading cryptocurrencies could go towards reducing your income tax liability by deducting realised losses against future profits or other income. More information how to assess losses may be found here.

Similar to the IRS in the United States, the HMRC is planning to investigate cryptocurrency exchanges to identify any individuals who may have evaded taxes. It is not clear at this juncture how far back the HMRC will go in their investigations although reports suggest they may backdate their investigation by two to three years.

It is important you speak to a tax advisor about your specific circumstances.

GERMANY

Cryptocurrency capital gains tax in Germany – Kryptowährung steuer

Tax Authority: Federal Ministry of Finance
Capital Gains Tax: No, although a progressive rate of income tax rising up to 45% applies to all gains if the cryptocurrency assets are owned for less than one year
Classification: Treated as private money
Sales tax: No

Treatment of crypto gains

Bitcoin and other cryptocurrencies are treated as private money in Germany and therefore individuals that hold them for more than one year are exempt from capital gains tax and not taxed from an income standpoint either.

Also, the German Federal Ministry of Finance had released a message to the public in early 2018 clarifying that cryptocurrencies would not be taxed if they are used in payments. 

Tax on cryptocurrency gains is to our understanding only applicable to trading activities, so if a crypto is held for less than one year you may become subject to German income tax. Income tax in Germany runs on progressive scale that increases to 45%.

Treatment of crypto losses

Whether it is possible to offset trading losses against the income to minimise the tax liability is unclear at this juncture. It is highly advisable you speak to a professional tax advisor in your country about your individual circumstances.

SWEDEN

Cryptocurrency capital gains tax in Sweden – Skatt på crypto

Tax Authority: Swedish Tax Agency
Capital Gains Tax: Yes 
Classification: Treated as personal investment with a flat 30% rate of tax on gains although if classified as a trading activity or business income then it taxed on a case by case basis
VAT (sales tax): No

Treatment of crypto gains

Typically profits from cryptocurrencies are treated just as investment income in Sweden and therefore a flat rate of 30% personal capital gains tax is levied on the sale and exchange of cryptocurrencies.

However, if the STA treats your trades as a business activity, rather than a personal one, the rate of tax could be considerably more. The rate of tax varies on a case-by-case basis.

Treatment of crypto losses

In Sweden it is possible to offset capital losses against capital gains although this depends on type of gain/loss. The tax system in Sweden is renown for being complex, and may be especially so with regards to cryptocurrencies. As always it is advisable to consult a professional tax advisor about your individual circumstances.

It is also important to note the STA has been actively investigating cryptocurrency traders. In 2018, it was reported that the STA had investigated the activities of up to 400 Swedish cryptocurrency traders.

SWITZERLAND

Cryptocurrency capital gains tax in Switzerland – taxe crypto monnaie suisse

Tax Authority: Federal Tax Administration
Capital Gains Tax: No 
Classification: Treated as foreign currency
VAT (sales tax): No

Treatment of crypto gains

In Switzerland taxpayers are subject to wealth tax and income tax, which vary according to province, or canton.

In general the Swiss Federal Tax Administration considers cryptocurrencies as ‘foreign currency‘ for wealth tax purposes and therefore anyone who trades and invests on their individual account is exempt from capital gains tax.

However, professional traders, who rely on the income of their trading activity, would be subject to business income tax since gains are treated as a ‘self-employed income‘.

The Swiss Federal Tax Administration has several criteria for determining whether trading is deemed to be ‘self-employed income‘, including the holding period and number of trades within a year. Generally, if the cryptocurrencies are held for less than 6 months and the trading volumes are greater than five times the number of the assets owned at the beginning of the tax period it is possible for income tax on realised gains to arise.

Treatment of crypto losses

Professional traders may deduct realised gains any accumulated realised losses. However, individuals who are tax exempt on their private wealth cannot deduct any capital losses.

JAPAN

Cryptocurrency capital gains tax in Japan – 仮想通貨税金

Tax Authority: National Tax Agency
Capital Gains Tax: Yes 
Classification: Treated as property
VAT (sales tax): No

Treatment of crypto gains

The NTA treats profits on bitcoin and other cryptocurrencies as miscellaneous income, and is therefore subject to capital gains tax at rates of 15%-55%, due to it being legally classified as ‘property‘.

Salaried employees that make a cryptocurrency capital gain of less than 200,000 yen within a fiscal year are not taxed on those gains. Any capital gains above that threshold is subject to tax and it is mandatory to report it to the NTA.

Cryptocurrency tax laws in Japan may become more crypto friendly in future. As a matter of fact there are proposals to change the current capital gains tax regime to a flat rate of 20%.

Treatment of crypto losses

Under the current tax system, it is not possible to deduct realised losses from gains to lower your tax liability. However, there are proposals to change this and even allow losses from cryptocurrency transactions to be carried forward. That would mean losses from crypto transactions within one fiscal year could be carried forward to following years to offset profits.

In order to combat tax evasion and under reporting, the NTA is planning to retrieve user information from crypto exchanges, and those who are earning more than 10 million yen in crypto will be primarily targeted. This is expected to come into force in April 2020.

As always, it is advisable you speak to a professional tax consultant in your country to discuss your individual circumstances.

CHINA

Cryptocurrency capital gains tax in China -加密货币税 

Tax Authority: State Tax Administration
Capital Gains Tax: Unknown 
Classification: Treated as digital property although its use a a fiat currency is illegal
VAT (sales tax): Unknown

Treatment of crypto gains

Bitcoin and other cryptocurrencies are not recognised as legal tender in China and therefore trying to use digital currencies as a means to replace fiat currency is strictly considered to be illegal.

This does not mean that holding cryptocurrency in China is illegal. As a matter of fact, on 18 July 2019, a court ruling by the Hangzhou Internet Court indicated that bitcoin is recognised as ‘digital property‘. This means purchasing bitcoin or other cryptocurrencies through lawful means will be protected (as property) by the country’s civil law system.

Treatment of crypto losses

Unknown

AUSTRALIA

Cryptocurrency capital gains tax in Australia

Tax Authority: Australian Tax Office
Capital Gains Tax: Yes 
Classification: Treated as property
VAT (sales tax): Not applicable

Treatment of crypto gains

The ATO considers cryptocurrency as ‘property‘ and any financial gains resulting from the sale of bitcoin and other cryptocurrencies will generally be subject to capital gains tax.

The capital gains tax is applicable to cryptocurrencies at the time of sale or disposal. The capital gain is simply the difference between the Australian dollar value of the sold asset at the time less the Australian dollar value of the disposed asset at the time it was bought.

Investors and traders are responsible for record keeping. Transaction records must be kept for a period of five years (from when the transaction occurs.)

Generally, if cryptocurrency assets have been held for over twelve months (before disposal), then a Discount Method may apply. Conversely, if cryptocurrency assets are held for less than twelve months before disposal, then the Discount Method would no longer be applicable.

Official ATO guidelines concerning the cryptocurrency taxation in Australia may be found here.

Treatment of crypto losses

The ATO recognises that you may lose their cryptocurrency wealth to scams and hacks. Therefore anyone losing access to their cryptocurrency may be eligible to claim a capital loss. Further details here.

On a separate note, the ATO is cooperating with cryptocurrency exchanges and other crypto service providers in a bid to crackdown on tax evasion.

It is understood the ATO is requesting user records to identify the names and addresses of cryptocurrency traders and investors who have failed to disclose their cryptocurrency holdings and income details correctly.

The ATO is urging people who may have made an error or an omission in their tax return to contact them as soon as possible, as penalties may be significantly reduced in circumstances where they were contacted prior to an audit.

It is highly recommended you discuss your individual circumstances with a professional tax advisor in your country.

Concluding remarks

Anyone looking for further information and useful resources may want to visit Bitcoin Tax, CoinTracking, and Koinly. If you found this page to be valuable then please share your feedback with us. You may contact us on: info@coinmarketexpert.com

 Disclaimer: The information provided on this page is for general information purposes only and is subject to change without notice. The information on this page has been completed to the best of our knowledge and does not claim either correctness or accuracy. Furthermore, the information is not intended to substitute tax, audit, accounting, investment, financial, nor legal advice and therefore the contents should not be used to make any such decision.  Always consult a professional tax advisor in your country about your specific situation before making any decisions. 

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