Crypto tax for beginners
There is a common misconception that crypto traders are trying to avoid paying tax, but it must be known that there is a tax on crypto.
Cryptocurrency falls into two main tax groups: Capital Gains Tax (CGT) and Income Tax. Knowing which applies to you is essential to avoid any nasty surprises.
In this article, we will go over the basics surrounding crypto tax and point you towards some valuable tools to make everything that bit easier when the tax man comes knocking. Now, let us break things down a bit.
Capital Gains Tax
When does it apply?
Capital gains tax is a levy on the profits made when an investment is sold or disposed of. This is the same for cryptocurrency profits. You will have to pay capital gains tax if you make a profit when you dispose of a coin or token, which applies to those buying and selling or investing in cryptocurrency. However, what do we mean by disposal or a capital gains taxable event?
A disposal/capital gains taxable event can be:
- Selling your cryptocurrency for a fiat currency
- Exchanging one coin for another, for example, Bitcoin to Ethereum
- Buying products or services with your crypto
- Gifting crypto to someone other than your spouse or civil partner
How to work out if you have made a profit/loss?
You can figure out how much capital gains tax you owe by determining the Cost Basis, which is the initial price paid for the coin/token, including fees. Then you minus the value at disposal from the cost basis to give you your capital gain/loss.
This is the most basic coin basis calculation, but there are other types depending on your country so check which formula they want to work it out correctly. If this feels too much for you, is a crypto tax calculator that can help you work out how much CGT you owe. We recommend Koinly, but we will chat about them later.
CGT rates
Now you have worked out if you have made a profit on your crypto investments, it is good to know roughly how much tax you will have to pay. Each country has different capital gains tax rules and allowances, so be sure to check your country’s guidelines.
UK
In the UK, the amount of capital gains tax owed is based on how much you earn rather than short-term and long-term CGT rates. So if you earn less than £50,270 in the tax year, you pay 10% CGT on your profits, and if you earn above this, you will pay 20% CGT.
CGT Allowances
Some countries give a capital gains annual tax free allowance so again, make sure you check your country’s guidelines to save some pennies on the capital gains tax bill.
UK
The CGT annual tax-free amount in the UK for the tax year 2023 to 2024 is £6,000 for individuals, this is decreasing to £3,000 from April 2024.
Canada
There is a capital gains tax allowance of $14,398, and only 50% of your crypto profits are taxed.
USA
If you earn less than $41,675 a year, you do not have to pay capital gains tax on long-term gains. Additionally, if you have held your crypto for more than a year, you are subject to lower tax rates ranging from 0-20%.
CGT Loses
Even though you usually want to focus on your gains when investing, it is good to keep note of your losses. In most countries, you don’t get taxed on crypto losses, but you can offset your net losses against your net profits. By offsetting the losses, you will reduce your total capital gains tax.
Income tax
When does it apply?
Income tax is when your gains from crypto are treated like income. In these instances, you will be subject to your regular income tax bands depending on your country of residence and are liable to pay income tax. You may be subject to other taxes, for example, national insurance contributions in the UK.
However, what counts as taxable income?
- Staking rewards
- Mining coins/tokens
- Earning in crypto
- Defi interest
- Airdrops
- Referal bonuses
Income tax rates and allowances
The income tax rate depends on how much you earn and your country’s tax brackets. Again, check if you have any allowances to save money. Some countries’ tax systems can be confusing when working out your taxable income, so we advise using tax sites to figure this out for you.
However, here is a brief overview of tax brackets for the UK as an example.
UK
The UK is broken down into four tax brackets.
- Personal allowance: <£12,570 annually - not subject to income tax
- Basic rate: £12,571-£50,270 - subject to 20% tax
- Higher rate: £50,271-£125,140 - subject to 40% tax
- Additional rate: >£125,140 - subject to 45% tax
Note that you don’t have a set tax band rate. It goes up in stages, so if you earn £70,000, the first £12,570 won’t be taxed, then you will pay 20% on the next £37,699 and 40% on the remaining £19,729.
Tax software
As mentioned, there are now some handy tools to calculate your crypto tax bill. Our favourite of these is Koinly.
This site helps you quickly and easily import your crypto transactions, mining income, and any interest earned. They then take it from there using this data to determine how much capital gains or income tax you owe.
They offer tax calculations for over 20 countries and allow you to download your tax report to help you pay your crypto taxes. They work alongside tax firms and key financial institutions worldwide to ensure that they follow the current regulations to ensure you are never caught out. To find out more, visit Koinly for more information.
Summary
Worldwide, crypto is recognised as a taxable asset through capital gains or income tax. Knowing which category you fit into is crucial to ensure you declare your earnings correctly on your tax return.
Every country has a different tax law; however, they also have some favourable tax rules that can help reduce the amount you pay on your cryptocurrency investments or earnings. So check the guidelines applicable to you, and if this all feels too much, check out sites like Koinly to help with your crypto tax needs.