Why is the Government Collecting Taxes on Crypto?
Before diving into the specific tax laws and regulations of each region, it is important to understand the reasoning behind why governments are collecting taxes on crypto. Essentially, governments view crypto as a form of property, similar to stocks or real estate, and thus impose capital gains tax on any taxable actions involving digital assets, such as selling, gifting, or trading. Gambling with crypto is also subject to tax laws, with winnings considered taxable income.
Do I Need to Pay Taxes on My Crypto?
The short answer is yes, you are required to pay taxes on your crypto if you live in any of the countries mentioned above. However, the specific laws and regulations surrounding crypto taxes can vary greatly from country to country. It is important to consult with a tax professional or conduct thorough research to ensure that you are fully compliant with the laws in your country.
How Taxes Differ Globally?
Now that we understand the basics of crypto taxes, let’s take a closer look at how they differ globally. Tax laws and regulations vary globally, with big earnings potentially incurring a big tax bill depending on the country.
Moreover, while there is no specific guidance on crypto gambling winnings, there are guidelines on crypto and gambling taxes. The type of tax paid on crypto gambling depends on the transaction, such as betting, winning, or selling for fiat currency. Capital gains tax is applied to profits made from the sale of cryptocurrency won through gambling. The cost basis, or the original cost of the cryptocurrency, is used to calculate the tax. However, the tax laws regarding crypto gambling winnings vary by country. In some countries, such as Canada, the entire amount may be subject to capital gains tax, while in others, like the US and Australia, there may be options to adjust the cost basis and reduce the amount of tax owed on the proceeds.
In the United States, cryptocurrencies are treated as property for tax purposes, as decided by the IRS in 2014. Thus, most taxable actions involving digital assets will incur capital gains tax treatment, similar to how stocks are taxed. The tax rate on capital gains varies depending on how long the assets were held, with short-term capital gains and long-term capital gains.
In terms of percentages, the U.S. tax code treats short-term capital gains from cryptocurrency as regular income, which means the rate can be as high as 37% for those in the highest income tax bracket. For long-term capital gains, the tax rate is much lower, with 0% for those in the 10% or 12% tax bracket, 15% for those in the 22%, 24%, 32%, 35%, or 37% tax bracket, and 20% for those in the highest income tax bracket.
It’s important to note that these percentages are subject to change and may vary depending on the individual or combined marital income. It’s also important to note that the IRS has not yet provided clarity on whether minting tokens – including creating wrapped tokens, publicly minting NFTs, or minting interest-bearing assets – creates a taxable event or not. Nor is it clear at this stage whether depositing or withdrawing liquidity from DeFi liquidity pools using liquidity provider (LP) tokens are considered a crypto-crypto transaction.
Professional guidance should be sought if you’ve dealt with any of these assets or processes over the last tax year. To prepare for the U.S. crypto tax season, it’s recommended to keep detailed records of all cryptocurrency transactions, consult with a tax professional well-versed in crypto taxes, and use software or tools to assist with calculating capital gains and losses.
In the United Kingdom, tax season runs from April 6 to April 5 of the following year, and individuals are required to pay taxes on their crypto trades. The United Kingdom treats crypto assets as property, and are subject to capital gains tax and income tax. The rate of capital gains tax is determined by an individual’s overall income tax rate, which ranges from 18% to 45%. For example, if an individual earns £5,000 ($6,836) in capital gains from selling crypto, they would be subject to 18% capital gains tax, amounting to £900 in taxes.
Income tax and national insurance contributions are applied to earnings from activities such as mining and working for a decentralized autonomous organization (DAO). These earnings are subject to the same income tax rates as regular income, which range from 0% to 45%. The tax guidance for DeFi protocols can be complicated, and the HM Revenue and Customs (HMRC) considers factors such as the duration of a loan and the type of return when determining tax liability. For example, interest earned from lending crypto on a DeFi platform may be subject to income tax, while capital gains tax may be applied to profits earned from selling a token received as interest.
It is important to note that the above examples are for illustration purposes only, and actual tax liability may vary depending on individual circumstances. It is recommended to consult with a tax professional or accountant to determine the specific tax implications of crypto transactions.
In the European Union, the regulation and taxation of cryptocurrencies is left up to individual countries, however, there is a push for a common framework for regulation at the EU level and on an international level. The European Parliament recently voted for powers to address anonymity issues in relation to cryptocurrencies, as they have been linked to organized crime, money laundering, terrorism, and tax evasion. The main focus is currently on ensuring that countries and companies can effectively conduct due diligence and apply KYC/AML standards. There is still debate over whether cryptocurrencies are currencies, assets, or securities, and how they are used by individuals. As a result, the taxation of cryptocurrencies in the EU is complex and varies by country. In general, cryptocurrencies are taxed under capital gains tax, income tax, or VAT.
Capital gains tax is applied when a person sells a cryptocurrency at a higher price than they purchased it for.
Income tax is applied when a person receives cryptocurrency as income, for example, as payment for goods or services.
VAT is a sales tax that is applied to the purchase of goods and services.
The tax rate for these categories can range from 0-50%, depending on usage and the individual’s tax bracket. For example, in Portugal, the tax rate on capital gains from cryptocurrency is 22%, and in Malta, it is 5%. In Slovenia, the tax rate on income from cryptocurrency is 17%, and in Germany, it ranges from 0-45% depending on the individual’s income bracket. These are examples of countries in the EU with the most favorable tax rates for Bitcoin holders, but it is important to note that the tax laws and regulations are subject to change and may vary depending on the country.
In India, the government has recently passed new tax rules for cryptocurrency that are not favorable for crypto investors. The new law taxes crypto earnings at 30%, which includes capital gains and income from mining. This tax rate is the same as the rate applied to gambling winnings. In addition to the 30% tax, there is a 1% tax deduction at source (TDS) that went into effect in July 2022. Centralized exchanges are responsible for making TDS deductions, but it is unclear how this rule would be enforced for decentralized exchanges. This new law has caused concern among crypto investors in India, as it could discourage investment in the crypto market. However, it’s important to note that TDS deductions can be claimed back at the time of filing taxes, by providing relevant proof of TDS deduction and the actual tax paid. The process of claiming the TDS back can be done electronically through the e-filing portal provided by the Income Tax department, or through a tax professional.
In Nigeria, the Central Bank of Nigeria (CBN) has issued warnings about the use of cryptocurrencies, stating that they are not legal tender and that individuals and businesses are at risk of losing their investments. However, the CBN has also acknowledged that there is a growing interest in digital assets, and has called for a regulatory framework for crypto taxes. The Nigerian government has not yet released any specific regulations for crypto taxes, and it is unclear how the government will approach the taxation of digital assets.
It’s likely that the Nigerian government will treat cryptocurrencies as assets, similar to how other countries like the United States and Canada tax digital assets, because, like other assets, the value of cryptocurrencies can appreciate or depreciate, and they can be bought, sold, and traded on various platforms. If this is the case, it’s possible that the tax rate for capital gains on digital assets could be similar to the rate applied to other assets, such as stocks or real estate. In Nigeria, the capital gains tax rate is 10% for individuals and 30% for companies. Additionally, it’s also possible that the Nigerian government could impose a value-added tax (VAT) on the purchase or sale of digital assets, similar to how VAT is applied to other goods and services. The current VAT rate in Nigeria is 7.5%. However, it is important for individuals and businesses to stay informed and comply with any regulations that are put in place in the future.
In Indonesia, it is currently unclear how the government plans to classify and tax cryptocurrency transactions. One possibility is that they may treat it as a foreign currency, similar to how the US IRS classifies it. This would mean that any capital gains or losses from trading or using cryptocurrency would be subject to tax. Alternatively, the government may classify cryptocurrency as a form of property, similar to how stocks or real estate are taxed. This would imply that taxes would be applied to any gains or losses from the sale or exchange of digital assets.
However, given the lack of specific regulations in place, it is difficult to predict exactly how the government will proceed. But it’s likely that the government would treat crypto as a form of asset and impose capital gain tax on it, which is typically around 20-30% in other countries. As the crypto market is still developing, it’s important for individuals and businesses to stay informed about any new legislation or regulations that may be put in place and to comply with them accordingly.
In Brazil, the government has issued guidance stating that cryptocurrency transactions are subject to capital gains and income tax. The capital gains tax rate for crypto assets is 15% for individuals, and 25% for legal entities. This rate applies to profits made from selling or trading cryptocurrency. For income tax, the rate is based on the total income earned, which ranges from 7.5% to 27.5%, depending on the amount earned.
There is a social integration program (PIS) and a social security financing (COFINS) tax which is both at 1.65% applied on top of the capital gain tax. The government has warned individuals and businesses about the risks associated with investing in digital assets, and has advised them to stay informed and comply with any tax regulations related to crypto transactions. It’s important for individuals and businesses to stay informed about new legislations or regulations that may be put in place, and to comply with them accordingly.
In Russia, the government has issued guidance stating that cryptocurrency transactions are subject to a 13% flat tax rate on capital gains made from selling or trading cryptocurrency. This rate applies to both individuals and legal entities. Additionally, earnings from activities such as mining are subject to income tax, which ranges from 6% to 35% depending on the amount earned. The government has warned individuals and businesses about the risks associated with investing and trading in digital assets. Thus, we advise you to stay informed and comply with any tax regulations related to crypto transactions in Russia.
In conclusion, understanding crypto taxes can be a complex and confusing topic, but it is important to know the basics in order to properly report your crypto activity and avoid any potential issues with tax authorities. While regulations vary by country, it is important to stay informed and consult with a tax professional if you have any questions or concerns. Remember, not all crypto transactions are taxable and it is important to keep track of your cost basis and date of acquisition to determine the potential tax impact for when you eventually sell. Additionally, it is also important to be aware of any taxes related to crypto gambling and betting, as these may also be subject to tax laws. By staying informed, and on top of your crypto taxes, you can ensure that you are following the law and avoid any unnecessary headaches down the road.