If you have been trading or investing for a while, you’ve heard the term ‘cryptocurrency’ several times, but you likely want to learn more about it. It refers to digital currency.
According to IRS, cryptocurrency or crypto is a “digital representation of value.” No central authority controls digital currencies, but governments have enacted various laws and regulations that govern cryptos usage within their local jurisdictions.
So, what do you need to know about cryptos and taxes? Due to the differences in legislation and regulation, you should focus on the taxation laws governing different countries. Read on for more about IRS, cryptocurrency taxes in various countries across the world, and more.
What is IRS?
IRS stands for Internal Revenue Service, the U.S. agency that collects taxes and enforces tax laws. It has been in operation since 1862. Since then, the agency has been operating under the United States Department of the Treasury’s authority.
The primary purpose of the IRS includes collecting employment and individual income taxes. Besides, it handles excise, corporate, gift, and ad estate taxes, including dividends and mutual funds.
According to IRS 2014 regulations, U.S. citizens and residents who use cryptocurrency should pay capital gains taxes. Moreover, they have the legal obligation to report transactions involving crypto on their tax returns.
Why Report Your Transactions Involving Crypto-Assets?
IRS considers digital currencies to be property. The law requires anyone who engages in transactions involving physical property to report the same to the agency on their tax returns. Since it now recognizes digital currencies as property, crypto traders have the legal obligation to report to IRS transactions involving crypto as U.S. dollars on their tax returns.
To comply with the law, taxpayers must determine the income’s fair market value as at the transaction date.
One way to determine the fair market value is to convert the cryptocurrency into U.S. dollars. The next option is to convert it into another fiat currency that you can convert into U.S. dollars.
You may need to do some serious booking keeping or use QuickBooks.
Taxes on Cryptocurrency Holding and Trading in Different Countries
You likely would like to know taxes on cryptocurrency holding and trading in different countries. That would be a good decision. The legal status of digital currencies differs depending on jurisdictions, as we have explained in detail in this article, Cryptocurrency Worldwide Regulation.
Let’s consider the tax regimes of various countries across the world to understand the difference and see its impact on taxpayers:
The United Kingdom
Similar to many other countries, the U.K. taxes its exchange tokens based on the holder’s activities.
If you hold the token as a personal investment, the law requires you to pay Capital Gains Tax as the majority does. In other words, the HMRC treats crypto as property or asset.
Depending on your income tax bracket, you pay either 10% or 20% on the profits.
However, if you are a day trader working with cryptos for a living, HMRC regards you as a ‘trader.’ In this case, you should pay Income Tax. The rate ranges from 0 to 46%, depending on:
Whether you are residing in Scotland and the other parts of the U.K
Your income bracket
Please note that taxpayers can offset future trade losses against future incomes to reduce their Income Tax liability.
The United States
IRS treats all cryptos as capital assets like it does property, bonds, and stocks. This means whether you use your virtual currencies for buying goods and services or investing and trading, they are subject to taxation.
Here are the instances that the U.S. tax law regards as taxable:
Trading digital currency for fiat currency
Trading cryptocurrencies
Using cryptos to buy goods and services
However, the law states that you are not eligible to pay taxes in the U.S. when:
Gifting someone cryptocurrency if you don’t exploit the legal gift tax threshold
Conducting wallet-to-wallet transfers
Buying cryptocurrencies with USD
Note that if you hold your digital assets for more than a year, you pay Long-Term Capital Gains Tax. It is typically half of the Short-term Capital Gains.
The European Union
Most members of this union have not enacted specific tax laws. The tax policies comply with the requirements of local authorities. They levy 0-50% tax, depending on the taxpayers’ tax bracket and the use of the digital assets.
Countries that levy taxes do so under VAT, income tax, and capital gains tax.
Here are the major European countries and their respective tax laws:
France
The tax authorities in France regard gains from crypto as assets and tax them at 19%. Besides, they levy a social contribution fee of 17.2%. However, the French tax authorities consider profits from crypto mining as industrial and commercial gains. So, they impose a tax of 45%.
Germany
Germany views cryptocurrency as an asset or property. If you hold it as a private asset, the authorities impose a Capital Gains Tax of 30.5%. This happens in case the purchase and sale occur in less than 12 months.
Sweden
In Sweden, the tax authorities subject cryptocurrency exchange to a Capital Gains Taxation of 30%. They also treat the mining of digital currencies as income from employment or business income and then tax it accordingly.
India
India is unique in the way it treats cryptocurrency. It has banned exchanges and banks from dealing with crypto assets. However, unlike many other nations, the country considers cryptos as good and services. For that reason, it has been contemplating applying 18% Goods and Services tax on these transactions for a while now.
Once its law is appropriately defined, India’s tax laws could be one of the most progressive ones. Here is more about cryptocurrency exchange in India.
Conclusion
Cryptocurrency has gained a lot of traction over the past decade. However, the tax laws are notoriously vague. Some traders and investors find themselves in trouble with their local tax authorities for unintentionally violating the rules and regulations.
The IRS and other tax agencies worldwide are working hard to collect taxes and are prepared to take legal action on individuals who breach the law. There is no better time than now to learn about taxes on cryptocurrency holding and trading in different countries.