A guide to crypto taxes around the Western world
Tax regimes from Ireland to New Zealand continue to play catch up with an ever-evolving industry
- Shared global challenges for crypto taxes
- Regulating the exchanges
- The question of jurisdiction
- United Kingdom: Key crypto tax guidance takeaways
- Ireland: Key crypto tax guidance takeaways
- Australia: Key crypto tax guidance takeaways
- Latest developments in Australian crypto tax
- US: Key crypto tax guidance takeaways
- Regulatory rumble: IRS versus SEC
- Canada: Key crypto tax guidance takeaways
- Are mining rewards taxable?
- New Zealand: Key crypto tax guidance takeaways
- Crypto taxes in the future: CBDCs
No government on earth can resist the opportunity to pull in massive amounts of new tax revenue from the billion-dollar-plus global cryptocurrency market. Equally no government can resist the urge to regulate this hugely dynamic sector, barely a decade old, which sometimes resembles the Wild West, and which is rife with scams, dodgy deals and pitfalls.
But drawing up rules, laws and regulations to properly cover a marketplace that operates across multiple national boundaries, and involves hundreds of thousands of people eager to remain as anonymous as possible is a huge, and some might feel impossible task. Can it be done? We talked with experts to get a picture of the true state of cryptocurrency taxes in the northern and southern hemispheres, from the UK and Ireland to Australia and New Zealand by way of North America, to provide you with the latest information and issues surrounding crypto taxes across the English-speaking West.
Disclaimer: While this article attempts to explain crypto taxes in a straightforward manner, tax law is incredibly complex, confusing and constantly evolving. None of the information contained in this piece, including commentary from the experts, should be used as a basis for your filings and disclosure. Currency.com recommends hiring an independent tax accountant to help you understand your obligations.
Shared global challenges for crypto taxes
There are some common challenges regarding crypto taxes shared across English-speaking countries. One big issue is the perceived lack of understanding by taxpayers of disclosure and reporting requirements. Experts point to a lack of sophisticated accounting software and a lack of professional accountants working in the field.
In the UK, Jason Steedman, managing director of Steedman Accountants, a firm of chartered accountant based in Edinburgh, Scotland, said: “Evidence suggests that there is still likely to be a very large number of crypto asset holders in the UK who are probably unaware that they have tax liabilities to declare to HMRC [Her Majesty's Revenue and Customs], or if they are, how to go about doing so.”
Jerry Eitel, the New York-based partner emeritus at the global accountancy firm Prager Metis, said: “It’s kind of a disaster,” pointing to the “very opaque” processes that taxpayers must follow in order to stay compliant.
The lack of substantial guidance could have some serious ramifications for payers of crypto taxes, according to Eitel, who said that the tax authorities could start pursuing fraud claims should taxpayers fail to make accurate reports.
But given that crypto assets are not regulated by any governments or financial institutions, even if broader taxes on crypto apply, pursuing crypto tax fraud presents a massive challenge for the authorities. These challenges are compounded by the blasé attitudes of some centralised exchanges.
Regulating the exchanges
The United States is aware of these issues and is taking steps accordingly. Starting from 2023, the Infrastructure Investment and Jobs Act will require all exchanges to adopt KYC (know-your-customer) measures and report tax-related user and transaction information to the United States Inland Revenue Service (IRS). Julia Spina, a quantitative finance researcher at tastytrade, a live financial network that provides financial information, said: “The reporting requirements for crypto exchanges are becoming increasingly similar to those of traditional brokers.”
However, Spina also predicts that “most crypto traders will most likely minimise the impact of these regulations with similar methods as stock traders, using IRAs (individual retirement accounts) or holding assets long enough to qualify for long-term capital gains tax rates”.
The question of jurisdiction
Isaac Tebbs, chief executive of the New Zealand-based crypto marketing agency CryptoBoost, said: “Cryptocurrency wealth is difficult to tax because it is not tied to any specific country or jurisdiction. Unlike regular currency, cryptocurrency is not regulated or controlled by any government or financial institution. This makes it difficult to track and tax.”
This is as much an issue for business tax as it is for personal tax, potentially more so given the rise of the metaverse and what Eitel described as the “questions about nexus” surrounding the technology: which jurisdiction you fall into. However, Eitel also stressed: “The bottom line is, if you have employees in New York doing work for your crypto company, you have to file in New York.”
But these issues of nexus continue to rage on, since “everyone wants their share of the tax event”. Eitel even foreshadowed the possibility that “the IRS is eventually going to want everybody’s wallet information,” while also pointing out that currently the infrastructure necessary to hold this data simply does not exist.
United Kingdom: Key crypto tax guidance takeaways
According to HMRC, the body responsible for crypto taxes in the UK, “in the vast majority of cases, individuals hold crypto assets as a personal investment, usually for capital appreciation or to make particular purchases. They will be liable to pay capital gains tax when they dispose of their crypto assets.”
Crypto assets are classed as property for the purposes of inheritance tax.
Crypto assets received from employers as a non-cash bonus are subject to income tax and national insurance (NI) contributions, as are crypto assets derived from mining, staking and airdrops.
Mining rewards are classed as other taxable income
As it stands, HMRC does not consider cryptocurrencies as money, nor as stock or marketable securities. As such, they are not generally subject to stamp duty or stamp duty reserve tax, unless received as consideration for purchases of stock or securities.
For businesses, most taxes generally apply. This includes capital gains, corporation tax, income tax, NI, stamp duty and VAT.
Are these policies suitable for the current market? According to Jason Steedman: “Generally, yes, but at the more technical end of the crypto sector the tax legislation is behind the tech. NFTs are an example of how there is little current legislation, just very high-level guidance which is open to variable interpretation.”
Although Steedman believes that HMRC have largely done a decent job of keeping up with developments in the crypto sector, improvement is needed in some areas. He said: “HMRC puts the responsibility on the taxpayer to calculate and pay their taxes but without considering the lack of available professional accountants with the skills and tools required to calculate the crypto tax properly.”
Ireland: Key crypto tax guidance takeaways
The Revenue Commissioners (generally known as Revenue, the body responsible for Irish tax and customs regulation and therefore cryptocurrency taxes) treats crypto investments like investments in stock or shares in regards to capital gains tax
For businesses accepting payments in cryptocurrency, taxable profits are calculated in the same fashion as for fiat currencies
Although crypto is not considered a currency, the Court of Justice of the European Union (CJEU) contends that bitcoin constitutes a currency for VAT purposes.
When employees are paid in a cryptocurrency, the value of the crypto for the purposes of calculating payroll taxes is the euro amount attaching to the cryptocurrency at the time the payment is made to the employee.
Mining activities, however, are not subject to VAT, though income and corporate tax very likely apply
Australia: Key crypto tax guidance takeaways
The Australian Taxation Office (ATO), the body responsible for cryptocurrency taxes, says that capital gains tax is triggered when disposing of crypto assets, apart from instances where cryptocurrency is classed as a personal use asset.
Mined or airdropped cryptocurrencies, as well as staking rewards, are treated as personal income.
For businesses transacting with crypto assets, trading stock rules apply rather than capital gains tax.
Cryptocurrency paid out by employers as salary is subject to the Fringe Benefits Tax Assessment Act 1986.
Bitcoin is not considered a foreign currency under the Income Tax Assessment Act 1997.
Latest developments in Australian crypto tax
Are Australia’s tax rules suitable for the currency market? According to Jonathon Wilkes, principle at New South Wales-based Solve Accounting: “They are the best we have for now but a little outdated, given crypto moves so fast. There is no legislation or guidance that plainly fits the taxation of new assets, such as NFTs, and use of crypto to interact with DeFi protocols.”
What would ideally be changed going forward? Wilkes said: “Ideally in the future, the ability to rollover or defer gains on crypto to crypto transactions would be desirable, given uncertain values of most crypto. There are rollovers available to shareholders where they exchange shares for shares, but no such rollover for the crypto industry to encourage investment.”
The ATO is particularly proactive in certain fields of enforcement. “They have information-sharing agreements with Australian-based exchanges and are growing their capabilities to ensure taxes get paid on crypto gains,” explained Wilkes, adding: “I would only expect enforcement action to increase in this space over time, given the potential tax revenue at stake.”
According to Wilkes, “it is fair to say there are big changes on the horizon. The Australian government released a report in October 2021 which detailed numerous policy options for crypto, including better taxation rules to reduce compliance costs. The report was on the back of much consultation with the crypto industry, which is positive”.
US: Key crypto tax guidance takeaways
Similar to UK laws, crypto assets in the United States are treated as property. No applicable laws recognise cryptocurrency as money. The IRS states: “Virtual currency transactions are taxable by law just like transactions in any other property. Taxpayers transacting in virtual currency may have to report those transactions on their tax returns.”
Since crypto assets are classed as property, “their taxable value is based on capital gains or losses,” according to Time magazine.
Mining rewards are subject to self-employment tax.
From 2023, centralised exchanges will be required to document all transactions and report them to the IRS, as part of an overhaul of brokerage rules in the Infrastructure Investment and Jobs Act.
So far, no guidance has been given on the taxation of NFTs, although they are presumed as property, and are thus taxable upon purchase, sale and exchange.
Theresa Fette, chief executive officer at Digital Trust and board member of the leading crypto IRA platform Bitcoin IRA, says: “The need for additional tax guidance will come as cryptocurrencies become more readily used and are not being only held for investment purposes”.
Fette sees challenges in the field of tax-loss harvesting, telling Currency.com: “Currently, an investor may only deduct losses on an investment if the taxpayer doesn’t repurchase the identical asset within 30 days. Currently, this doesn’t apply to crypto. Congress has this on their radar for reform.”
Regulatory rumble: IRS versus SEC
US crypto and taxes law is complicated by the conflicting views of crypto assets between the IRS and the US Securities Exchange Commission (SEC). In the red corner, the IRS views crypto assets as income and believes it should be taxed accordingly, as is currently the case.
In the blue corner, the SEC is pushing to classify crypto assets as a security, bringing them under the purview of the Treasury.
The SEC getting its way could throw up some deep challenges, both financially and operationally speaking, for taxpayers in the crypto space. For instance, should an NFT artist fail to make the necessary filings and disclosures before minting and selling their new 10k project, they could be in serious violation of securities legislation. But even to comply with securities law requires expensive legal counsel.
Canada: Key crypto tax guidance takeaways
The Canada Revenue Agency (CRA) “generally treats cryptocurrency like a commodity for purposes of the Income Tax Act. Any income from transactions involving cryptocurrency is generally treated as business income or as a capital gain, depending on the circumstances.”
Canada treats the exchange of one crypto asset for another as a barter transaction, thus falling under the purview of the Income Tax Act.
Tax consequences are triggered when selling or gifting cryptocurrency; trading or exchanging cryptocurrency; converting cryptocurrency to fiat; and purchasing goods and services with cryptocurrency
Mining rewards are generally treated as business activity and taxed accordingly
Are mining rewards taxable?
Although there is some contention among the tax authorities as to whether crypto mining is classed as a hobby or business venture, the latter is generally considered the appropriate classification, though not always.
For instance, the Canada Revenue Agency (CPA) states: “The income tax treatment for cryptocurrency miners is different depending on whether their mining activities are a personal activity (a hobby) or a business activity. This is decided case by case. A hobby is generally undertaken for pleasure, entertainment or enjoyment, rather than for business reasons. But if a hobby is pursued in a sufficiently commercial and businesslike way, it can be considered a business activity and will be taxed as such."
Justin Hartzman, chief executive of the crypto trading platform CoinSmart, has some issues with Canada’s tax treatment of mining rewards. Hartzman told Currency.com: “Crypto mining taxation can be worked on. Cryptocurrencies are pretty volatile, and mining can be very expensive. What if BTC was priced at $60,000 on the day you mined them, and it’s currently priced at $30,000? I don’t see how that’s fair.”
But in general, Hartzman believes that the country’s overall crypto taxation policy is “pretty well-rounded and thought out as an initial framework. However, with all the new financial products being made available on the blockchain, this is certainly a work in progress.”
New Zealand: Key crypto tax guidance takeaways
The Inland Revenue Department (IRD) treats cryptocurrency as a form of property for tax purposes
Although New Zealand does not have a capital gains tax, crypto assets held by individuals for investment purposes are treated as assets and are subject to tax on gains and losses.
Since mining “is generally an activity aimed at making a profit, not a hobby,” income tax must be paid on mining rewards
Crypto assets received by employees are subject to PAYE rules since March 2021 (prior to that, crypto assets received by employees were classed as bonuses
Trading stock rules apply for crypto-asset businesses including block mining companies and trading platforms
In general, Isaac Tebbs believes that the country’s policies are suitable for the current environment. He told Currency.com: “New Zealand prides itself on having a broad-base, low-rate taxation environment which meets the country's fiscal needs without being overbearing. New Zealand's tax authority has generally been quick to provide guidance and has a level of understanding of digital currencies.”
Does the IRD find it difficult to enforce tax rules on crypto assets? In Tebbs’s view: “Enforcing cryptocurrency taxation can be difficult, as the IRD must track and monitor cryptocurrency transactions in order to identify those that owe taxes. This can be challenging, as cryptocurrency is pseudonymous and can be used for illegal activities. However, the IRD has indicated that it plans to crack down on tax evasion related to cryptocurrency, and will "take appropriate enforcement action against those that do not comply.”
Crypto taxes in the future: CBDCs
The constantly evolving nature of crypto will no doubt continue to provide continuing challenges for the taxation of digital assets, both from the disclosure and enforcement side.
The consensus among experts points to a need for clearer guidelines on filing and compliance, while jurisdictional challenges, compounded by the metaverse, will continue to be a field of contention.
But there could be another major source of confusion on the horizon. Governments around the world continue to conduct research into central bank digital currencies (CBDCs). In March 2022, the Bank of Canada and the Massachusetts Institute of Technology (MIT) announced a 12-month research collaboration into the prospect of developing a centralised digital currency.
Justin Hatzman asked: “If that’s the case and CBDCs are in their roadmap, it will be interesting to see the taxation policy that the government will adopt with CBDCs. Will they be treated differently, or will they be in the same bracket as cryptocurrencies?”
As the crypto market and cryptocurrency taxes continue to evolve, be sure to stay with us at Currency.com for the last news and developments.
How much does crypto get taxed?
That is entirely dependent on the jurisdiction and type of transaction. In general, crypto assets are considered property or commodities, thus are subject to each country’s applicable direct taxes, including inheritance, capital gains, income and corporation tax. Mining rewards are usually subject to corporation tax.
How to calculate crypto taxes
Unfortunately, sophisticated crypto tax software is difficult to find, while volatile crypto markets make things even more difficult. On the plus side, more and more accounting firms are starting to offer crypto accounting services. To avoid fines, Currency.com recommends consulting the tax experts. This article also provides links to the relevant government portals for each respective jurisdiction.
How to reduce crypto taxes
Professional services firms are becoming increasingly sophisticated in regards to crypto taxes. Therefore, it is advised to hire a professional tax consultant with deep knowledge of the crypto space in order to optimise your taxes.
What happens if you don't report cryptocurrency on taxes?
Do I have to pay taxes on cryptocurrency, you ask? The answer is yes. If not, you may be pursued by your country’s tax authorities. Since virtual currencies are generally deemed as property or commodities, associated rules and fines are applicable to your crypto holdings.