Crypto Taxation: What You Need to Know

Crypto Taxation and Accounting
Uncensored transactions are essential for a free society, however, for the purposes of this post, let’s focus on the issue of crypto taxation. 

When Bitcoin was created, very few officials in government understood cryptocurrency as a consequence crypto taxation was not even a thing. Moreover the number of people using Bitcoin was so small that governments had no urgent need to regulate.

However, as the market grew, governments around the world realised there was both a problem and an opportunity. The problem was that money that flowed across international borders without intermediaries could be used for laundering. And the opportunity was that they could raise large amounts of taxation from these transactions.

Uncensored transactions are essential for a free society, and also allow supporters to send funds to activists in repressive countries. However, for the purposes of this post, let’s focus on the issue of crypto taxation.

[Disclaimer: The purpose of this article is informative and cannot be considered tax advice]

Why is cryptocurrency taxation important?

Cryptocurrency is now big business. The current crypto market capitalization stands at more than $2 trillion. Coinbase is now a publicly traded company, after they were listed on the NASDAQ in April 2021. Large corporations hold crypto in their treasuries, and some of the world’s leading banks now offer crypto custody solutions. Individuals and companies who might previously have exposed themselves to crypto by buying stocks in miners are now trading directly.

In parallel, over the last two years, the DeFi sector has expanded beyond recognition. In a previous post, we described it as a decentralized mirror of the different financial instruments in the CeFi system. Investors can now get exposure to derivatives, options, collateralized loans and many other products individually or via DAOs.

This year’s explosion of interest in NFTs has hastened this trend. Thousands of people globally who had not used crypto before downloaded MetaMask wallets and opened OpenSea or Rarible accounts. Similarly, play-to-earn games attracted a new generation of participants, for example Axie Infinity in the Philippines.

There are two major misconceptions about crypto and taxation:

  • Some people wrongly think that crypto income is not subject to the same taxation laws as fiat currency
  • Some people think that other people are using crypto so that they do not have to pay tax at all

Needless to say, both these assumptions are wrong. While governments were initially slow to issue specific crypto tax regulations, any transactions that interfaced with fiat were automatically taxable. And most people reasonably expect to obey the law of their country and to pay tax on their income.

The problem is that tax regulations – already complicated for fiat transactions – can be very different for crypto. Additionally, different countries have very different rules, even within the European Union.

This can make it very difficult for people to declare their cryptocurrency earnings and profits correctly. In this case they can be penalized for evading taxes or losing out because they are not claiming offsets that they are entitled to.

Depending on which country you are in, you will probably have to pay tax on the following events:

  • Payment in crypto
  • Airdrops
  • Crypto gifts and donations
  • Buying digital assets (cryptocurrency or NFTs)
  • Mining
  • Staking
  • Selling digital assets
  • Minting NFTs
  • DeFi activities such as liquidity mining 

And even if your country does not tax you on the above activities, you may still have to declare them. 

Most tax departments will need the price of the asset on the date it is bought and sold. This is a daunting prospect, even for someone who buys and sells only occasionally. And for those who interact with DeFi protocols and NFT platforms on a daily basis, it quickly becomes unmanageable.

Why do countries treat cryptocurrencies differently?

Governments have different tax rules for crypto depending on whether it is classified as money or property. Because the idea of cryptocurrency is so new, there is no unified way of classifying it. For example, in Germany cryptocurrencies are classified as private money, while in the USA or UK, they are deemed to be property. 

This can cause major differences in the way countries tax crypto assets. In the UK, investors must pay capital gains tax on crypto profits regardless of timescale. In Germany, if you hold the asset for more than a year, you do not have to pay tax on profits.

Sometimes, specific countries may offer generous tax benefits to foreigners who move there. El Salvador, for example, levies no capital gains tax on crypto for immigrants because they want to attract inward investment. 

Different tax rules for retail investors and crypto companies

There are also different rules within the same country for individuals and for companies. For example, Portugal has extremely favourable rules if you hold digital assets in a personal capacity. If you live in Portugal, you do not have to pay any capital gains tax on your crypto profits. Unlike in Germany, you are even exempt from tax if you have held the asset for over a year. 

This rule makes Portugal an attractive destination for crypto traders. However, if you trade crypto as your main income source, you must now pay tax on your profits.

To summarize, tax regulations vary from country to country. Some activities are taxable in some countries and not taxable in others. But even where you do not have to pay tax, you still need to declare taxable events. 

This is where Skytale can help. Our future integration with Quickbooks (and later, other tax accounting software) provides a pain-free solution. It allows Quickbooks to consume all the information your tax return requires.

Not using Quickbooks? Skytale is still the easiest solution for your tax reporting requirements. Aggregate all your wallets in one dashboard and then download a .csv for a fine-grained view of your activities. You can also tag and filter your transactions for extra detail.

No one likes paying taxes or completing tax forms, but tools like Skytale can help remove at least some of the pain.

Our crosschain DeFi Asset tracker and investments aggregator can help you monitor your activities and allows you to cherry pick the relevant transactions and creates a spreadsheet you can share with your accountant. This way tax reporting on your crypto activities will be much easier.
Try Skytale here