How Does Crypto Tax Work?
Yes, crypto is taxable, and if you invested in crypto last year, you need to report it to the IRS. The IRS considers cryptocurrency holdings as ‘property’ for tax purposes. This means that any virtual currency you have is taxed the same way as any assets you own, such as stocks or gold.
US taxpayers are required to report any crypto sales, payments, conversions, and income to the IRS and state authorities (if applicable). Crypto is taxed in two ways: as income or as a capital gain. This article will explain what taxes you may owe in the US, as well as if you are an expatriate living in the UK.
When do you owe taxes on cryptocurrency?
The IRS treats crypto like stocks, bonds, and other capital assets – meaning that the money you gain from it is taxed at different rates. Crypto is either taxed as capital gains or as income, which just depends on how you got your crypto and how long you have held it for.
In order to understand whether you will pay taxes on your crypto, you need to look at how you used your crypto during the previous year. When assessing how you used your crypto, you are looking out for taxable events.
Taxable events:
Taxable as capital gains
– Selling crypto for fiat money such as US dollars
– Spending crypto on goods and services
– Trading in crypto: converting one cryptocurrency to another, or ‘buying crypto with crypto’. For example, trading Bitcoin for Ethereum.
Taxable as income
– Receiving crypto in exchange for goods or services
– Being paid in crypto
– Mining crypto : taxes are based on the fair market value (often the price) of the mined coins at the time they were received. Crypto that is mined as a business is taxed as self-employment income.
– Earing staking rewards: taxes are based on the fair market value of your rewards on the day that you received them.
– Earning other income
– Incentives or rewards: for example, incentives such as getting $5 in bitcoin for referring a friend. These will need to be reported as income.
– Getting crypto from a hard fork: taxes on crypto you obtained from a hard fork will depend on how you use the asset.
Non-taxable events:
– Buying crypto with a fiat currency such as dollars and holding it: crypto is only taxable later on when you sell it and receive capital gains.
– Receiving crypto as a gift: you are unlikely to pay any taxes on receiving crypto as a gift, up until you sell or participate in another taxable activity such as staking.
– Giving crypto as a gift: you can gift up to $15,000 per recipient per year without paying taxes on it. This amount is even higher in the case of gifts to spouses. If you give a crypto gift worth more than $15,000, you will need to file a gift tax return.
– Transferring crypto you own to yourself, between your accounts
– Donating crypto to a qualified tax-exempt charity or non-profit: if you are giving crypto directly to a 501(c )(3) charitable organisation, you will probably be able to claim a charitable deduction.
Do you pay taxes for purchasing crypto with dollars?
No, buying crypto with a fiat currency such as US dollars is non-taxable.
Do you pay taxes for trading cryptocurrency?
Yes, trading in cryptocurrency is taxable as capital gains.
How much do I owe in crypto taxes?
By calculating your income, gains, and losses, you can estimate how much you’ll owe in taxes on your crypto activity.
Calculating crypto income:
Any crypto that you receive as income is subject to the same income taxes that your salary is. Be cautious, as if you have earned a lot from your crypto activity, it may bring you into a higher tax bracket and you could end up paying a higher tax rate on your earnings.
Calculating capital gains and losses:
To calculate your gains and losses, you will first need to know how much crypto you started with (your cost basis). When buying crypto, your cost basis is generally the price you paid for it. When receiving crypto from mining or staking, your cost basis is determined by the fair market value when you received it. The cost basis of gifted crypto is dependent on the basis the person who gifted it to you had, along with the fair market value when you received it.
When selling crypto, subtract your cost basis from your sale price. This will determine whether you have a capital gain or a capital loss.
Short-term v long-term capital gains
How long you have held your crypto for will affect how much tax you owe. If you held onto your crypto for longer than a year before you sold it, you will generally pay lower taxes than if you sold your crypto right away.
Long-term gains are taxed at reduced capital gains rates and vary based on your income.
Short-term gains are taxed at your ordinary income rate, which is usually higher and less favorable.
Make sure you keep note of your losses, as these can reduce your tax bill.
IRS Forms and Resources for Reporting Crypto:
Form 1040: US Individual Income Tax Return, used to determine your total taxable income.
Form 8949: this is a worksheet relevant to your capital gains or losses from selling, converting or disposing of your crypto. Any gains or losses must be reported to the IRS on Form 8939.
1040 Schedule D: this schedule summarizes your capital gains and losses.
Taxes on NFTs
NFTs (non-fungible tokens) are tokens created on a blockchain that basically prove you are the only owner of a digital item. You are able to buy and sell NFTs in digital marketplaces. Like crypto, buying, selling, trading or minting NFTs is taxed. However, buying NFTs with a fiat currency is a non-taxable event.
If you are a professional creator who creates NFTs as a business and frequently mints NFTs, you can deduct the business-related expenses.
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Understanding Crypto Taxes as an Expatriate in the UK
How is crypto taxed in the UK?
Your crypto activity will either be subject to Capital Gains Tax or Income Tax in the UK. Which tax depends on the specific transactions you have made with your crypto. If you’re earning crypto, it’s taxed like income. If you’re selling, swapping or spending crypto, it’s taxed as a capital gain.
Capital Gains Tax on Crypto in the UK:
HMRC sees crypto as a capital asset, so when you dispose of this asset and make a gain, you will pay Capital Gains Tax. This includes:
– Selling crypto for any fiat currency
– Trading crypto for crypto
– Spending crypto on goods and services
– Gifting crypto, unless it is to a spouse/civil partner
Effectively, you are only paying taxes if you have made a profit.
What are crypto capital gains tax rates in the UK?
HMRC gives every UK taxpayer a Capital Gains Tax Allowance of £12,300 in the 2020-21 tax year. This means that you’ll only pay Capital Gains Tax on gains over £12,300.
The UK doesn’t have a short-term and long-term Capital Gains Tax rate. The amount of CGT you pay is dependent on how much you earn.
These are the 2020-21 rates:
| Tax Rate | Taxable Income |
|---|---|
| 10% | Basic Rate Income Band (up to £50,000) |
| 20% | Higher Rate Income Band (up to £150,000) |
| 20% | Additional Rate Income Band (more than £150,000) |
Therefore, dependent on your income band, you’ll either be paying 10% or 20% on any crypto gains for the tax year 2020-21.
What are the crypto income tax rates in the UK?
These are the 2020-21 rates:
Tax Rate Taxable Income Band
0% Up to £12,570 Personal Allowance
20% £13,571 - £50,270 Basic Rate
40% £50,271 - £150,000 Higher Rate
45% £150,000+ Additional Rate
Scottish taxpayers have slightly different Income Tax Bands.
Tax free crypto in the UK
Similar to the US, you won’t pay tax on your crypto in the UK when you are:
– Buying crypto with GBP
– Holding crypto
– Transferring crypto between your accounts
– Donating crypto to charity
– Gifting crypto to your spouse
Gifting crypto to your spouse can be an advantageous move if your spouse has not used their capital gains allowance for the year.
Calculating CGT on cryptocurrency (UK)
Calculating the Capital Gains Tax you owe on crypto in the UK is the same as in the US. First, figure out your cost basis, and then work out if you have a loss or gain. Remember to deduct your capital gains allowance of £12,300.
Crypto tax breaks in the UK
Crypto investors in the UK can make use of various tax breaks in order to pay less tax:
- The £12,570 Personal Income Tax Allowance: your first £12,570 of income in the UK is tax free for the 2021-22 tax year. You can subtract this amount when calculating what Income Tax bracket you are in. you are not eligible to receive this allowance if you earn more than £125,140 annually.
- The Trading and Property Allowance: £1,000 of income from trading or property is tax free in the UK. If you have both, then you can double it and get £2,000 tax free.
- Capital Gains Tax Free Allowance: you only pay tax on capital gains over £12,300.
Crypto Capital Losses in the UK
Like in the US, you should register losses with HMRC so you can offset capital losses against capital gains. These registered losses can be carried forward indefinitely, until you have fully utilised them. These losses are registered when you submit your self assessment tax return.
How does HMRC track crypto?
HMRC has a data sharing program with all UK exchanges, extensive crypto transaction data, and any KYC information you shared when signing up for a UK exchange wallet.
How do I report crypto taxes to HMRC?
Crypto taxes are filed as part of your Self Assessment Tax Return (SA100).
Reporting crypto capital gains and losses: SA100 and Capital Gains Summary SA108.
Reporting crypto income: Box 17 of your Self Assessment Tax Return.
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