A Comprehensive Guide to Crypto Tax Rules in 2023
Many governments are hesitant to fully legalise the cryptocurrency industry. Yet, incomes and profits made from crypto transactions and investments are receiving special attention from them. Why is that so? “Uncle Sam” (the personified tax authority) would always want to have part of citizens’ earnings! Therefore, it is important that you know the tax rules concerning crypto gains in your country.
In this article, we provide you with the most important tax-related information that will help you avoid getting prosecuted. It is useful to both crypto investors and traders. As you read it, we strongly encourage you to note the crypto tax rules in different counties as well as the best ways to send, receive, and file cryptocurrency payments.
Should You Pay Crypto Taxes?
Whether you will have to pay crypto taxes depends on how cryptocurrencies are classified in your country. For example, in the United States, the Internal Revenue Service (IRS) considers cryptocurrency among digital assets or property. Hence, this tax authority subjects cryptocurrency to short-term or long-term capital gains. Consequently, selling or exchanging cryptocurrency is classified as a taxable event.
You are not required to pay taxes for owning a cryptocurrency, as they are not taxable in and of themselves. It is when you use it to make capital gains or receive it as a payment for business that you have performed a taxable activity.
When it comes to cryptocurrency transactions, taxable events generally include:
- Selling crypto for cash or fiat money.
- Converting one crypto to another (which requires selling your digital asset for more than you bought it in order to buy a different one).
- Using crypto to pay for goods and services where it is not a legal tender.
- Receiving your wage or salary in cryptocurrency.
- Getting paid for goods sold or services rendered in crypto.
- Mining cryptocurrency (this event is taxed as self-employment income).
- Earning rewards on staked crypto.
- Receiving referral rewards or other incentives.
The above list is not comprehensive. There may be other taxable events related to crypto in your country. It is also possible that none of these activities is taxable in your location if it is a crypto-tax-free jurisdiction. In that case, you are not required to pay taxes on your crypto gains. Examples of countries and territories that do not charge capital gains or require income tax payments for crypto-based transactions as of March 2023 include El Salvador, Puerto Rico, the United Arab Emirates, and the Cayman Islands. Therefore, we have established that the tax regime in your location determines whether you should pay crypto taxes.
When Should You Not Pay Crypto Taxes?
You are not required to pay crypto taxes when you create non-taxable events. Here, we are referring to transactions that the government of your country has not classified as taxable. You do not owe any taxes on such events and do not need to report them to the IRS or your tax authority.
General examples of events that are not taxable concerning crypto-based transactions include:
- Holding crypto after buying it with cash or fiat money.
- Transferring cryptocurrencies to yourself, say between your crypto wallets.
- Receiving crypto as a gift.
- Gifting crypto to someone.
- Donating cryptocurrency to a non-profit or charitable organisation that is exempt from paying taxes.
Crypto Tax Rules in Different Countries
Bitcoin, Ether, Litecoin, and other cryptocurrencies incur taxes based on how they are legally defined and classified in various countries. In different parts of the world, crypto is taxed like stocks and other kinds of property that yield capital gains or personal income that can be exchanged for cash, goods, or services. Take a look at the following notable examples of how cryptocurrencies are taxed across the globe:
The United Kingdom
In the United Kingdom of Great Britain and Northern Ireland (UK), selling digital coins or cryptocurrencies is an event that requires the payment of capital gains tax rates. Basic ratepayers must pay 10% of their income or profit, while higher and additional rate taxpayers have to pay 20% to HM Revenue and Customs. Keep in mind that the tax-free allowance for capital gains tax in this jurisdiction is £12,300.
In the Federal Republic of Germany, cryptocurrencies are classified as "private assets"; hence, they incur income tax, which varies according to certain tax brackets that are based on annual income levels. Taxable earnings in this crypto-friendly jurisdiction include staking rewards, mining rewards, earning interest from DeFi (such as lending), and selling crypto within 12 months of purchasing or obtaining it. However, you will be taxed on your eligible cryptocurrency transaction only when the profit exceeds €600.
In the Commonwealth of Australia, cryptocurrencies are subject to capital gains and ordinary income taxes. Your regular tax rate, which can range from 19% to 45% depending on your income, will apply to short-term capital gains. However, if you hold your cryptocurrency for more than a year, your gains will be taxed at a 50% discount from short-term gains. For example, you spend $3,000 to buy Bitcoin, hold it for a year and two months, sell it for $7,500, and make a $4,500 profit. In this case, you will only be required to pay CGT on $2,250 worth of your profits, or 50% of your earnings.
The United States
In the United States of America, your crypto tax rate depends on your federal income tax bracket. As the IRS views cryptocurrencies as property rather than money, selling and buying them in the US is subject to taxes. Tax rates range from 0% to 37%. But note that, according to the latest rules from the IRS, minting NFTs, purchasing crypto with fiat money, gifting crypto within the personal gift limit, and locking up your digital assets in a staking smart contract are among the events that are not taxable in the USA.
In the Republic of India, cryptocurrencies are not currently regulated, yet they are taxed. According to the declaration made for the Union Budget of 2022, revenue from transfers of digital assets (including cryptocurrencies and non-fungible tokens) would be taxed at a 30% rate. Also, 1% TDS (tax deducted at source) was recommended for transactions involving cryptocurrencies.
In the Republic of Italy, cryptocurrencies are regarded as financial instruments and are thus taxed on capital gains. A 26% capital gains tax is due if the portfolio's value is more than €2,000. Trading one token for another, selling cryptocurrency for fiat, and using cryptocurrency to buy physical goods are all taxable transactions.
Tax-savvy Ways to Send and Receive Crypto Payments
11 Best Crypto Wallets and Cards
If you are worried about crypto taxes, you can optimise your tax liabilities by using a crypto wallet that has a payment card with cashback rewards for your purchases. Your crypto earnings will not be considered a taxable event in the case of a cash back because you will be spending without selling your cryptocurrency or converting it to fiat money. This is a smart way to make crypto payments!
For more information, here are our top 11 picks of the best digital wallets and physical or virtual cards for sending and receiving cryptocurrency payments.
The Coinbase Wallet is a single place for storing all of your cryptocurrencies and non-fungible tokens (NFTs). It is a self-custody wallet that allows you to use your smartphone or browser to explore the decentralised web while providing support for thousands of tokens and dApps.
Furthermore, you can order the Coinbase Card for all your purchases. This Visa debit card allows you to earn crypto back (without buying crypto) as you spend cash or crypto at more than 40 million stores worldwide. Thus, with Coinbase, you can avoid paying tax on all your crypto gains.
The Nexo Wallet is a smart crypto wallet for exploring the Web3 ecosystem and the DeFi world. You can use it to get the best crypto swap rates, make batch transactions at low costs, combine your DeFi portfolio, and showcase your NFTs and Ethereum Name Service (ENS) domains. What’s more, with this wallet, you can send, receive, and swap crypto coins on five different networks, namely Ethereum, BNB Chain, Polygon, Fantom, and Avalanche.
Crypto enthusiasts and investors can also get the Nexo Card, which is suitable for earning up to 2% crypto back on every purchase and is accepted by more than 90 million merchants worldwide. It is a Mastercard card that comes with low credit line rates that start at 0% APR and does not require minimum monthly repayments or fees. Besides, by letting you spend without selling your crypto, the Nexo Card helps optimise your tax liabilities.
The Crypto.com DeFi Wallet is a non-custodial wallet that gives you full control over your crypto keys and provides access to a variety of DeFi services, including DApps. You can use it to send and receive crypto conveniently. Also, its users can earn rebates on more than 25 digital tokens, which include CRO, TONIC, VVS, ATOM, and many other stablecoins. You can use it to seamlessly connect and mine on DeFi protocols and to deposit and view your NFTs in multiple formats across a variety of supported blockchains.
In terms of shopping and making payments, Crypto.com offers a Visa prepaid card that can be topped up with fiat and cryptocurrency. It is suitable for making secure purchases. While you can get up to 5% cashback on your spending with this card, it is important to keep in mind that it does not come with an annual fee.
The Uphold BTC Wallet is a safe and convenient way to store your digital coins. It is one of the most secure cloud-based digital wallets for buying, holding, sending, receiving, and exchanging cryptocurrencies at low costs. This wallet contains a set of Uphold Cards for holding Bitcoin, Ether, Dash, Litecoin, euros, US dollars, gold, and silver, so that you can easily send and receive payments online and in person. They are Mastercard cards that offer 4% cashback paid in XRP for every transaction with no annual fees and 0% foreign transaction fees.
5. OWNR Wallet
The OWNR Wallet (non-custodial) gives you secure access to your digital assets, enabling you to send, receive, buy, withdraw, and exchange Bitcoin, Ether, Litecoin, Dash, and many other cryptocurrencies. It comes with Visa prepaid cards for individuals and businesses to make seamless payments with crypto and withdraw cash from ATMs anywhere. You can order the cards with free delivery if you reside in a European Union country. The fee for using an OWNR Wallet card starts at €0.30.
The Choise.com Wallet is a multi-coin digital tool for buying, trading, storing, spending, investing, and cashing out more than 30 popular cryptocurrencies, including CHO, Ripple, Ether, Bitcoin, and Dash. The service is licensed and fully regulated in the European Union, and your funds are insured up to €150 million by BitGo.
With Choise.com, you can get the Crypterium Card, which is a Visa plastic or virtual card that costs €2.99 a month. But customers who load this prepaid card with €299 monthly will not pay the monthly maintenance fee. Also, you can use this card to withdraw cash from ATMs in more than 200 countries, as well as shop easily online and offline at over 42 million stores.
When you invite a friend to use the Choise.com Wallet, you and your friend will earn $5 in CRPT each, while you will get 25% of their commissions for a year.
7. TTM Bank
Open a TTM Bank Wallet account, order its Visa plastic and virtual cards, and your account will be credited with €25 and €10, respectively, which are not taxable. The TTM Bank Card is a great choice for instant replenishment with cryptocurrency and making payments all over the world. You can also use it to withdraw cash from ATMs. However, you will have to pay a monthly service fee of €2 to use this card.
The Wirex Wallet is a non-custodial crypto wallet for DeFi and NFTs. It supports eight blockchain networks and offers a reliable gateway to the Web3 world. This wallet lets you exchange digital tokens at the best rates, buy and sell crypto fee-free, and earn up to 8% cryptoback (cashback) when you spend with the Wirex Card. Also, with this card, you can make up to $200 in fee-free ATM withdrawals worldwide.
Binance offers the best wallet for the BNB Chain. This fintech company and cryptocurrency exchange has merged its Trust Wallet with its Extension Wallet to create a trusted Multi-Chain Wallet. With this new product, you can easily and securely store, exchange, swap, and earn cryptocurrencies while managing your assets across multiple blockchains. The wallet works with the Binance Card, which is a Visa debit card for spending your crypto and earning up to 8% cash back on every eligible purchase. You can also use the card to make free ATM withdrawals with no foreign exchange fees.
The Gemini Wallet is an insured hot wallet for storing your assets and investing confidently under high security. Users of this wallet can order the Gemini Credit Card, which is a no-annual-fee Mastercard card for earning rewards when you spend crypto at millions of stores. It offers 3%, 2%, and 1% cash back on dining, groceries, and everything else, respectively. The rewards are available in BTC, ETH, and more than 40 other cryptocurrencies.
The BitPay Wallet gives its users full control over their crypto keys and digital assets. It supports Bitcoin, Ether, Dogecoin, Litecoin, Polygon, major altcoins, tokens, and stablecoins (such as the Gemini Dollar, Binance USD, and Pax Dollar). With this wallet, you can buy, store, exchange, swap, and spend cryptocurrencies.
BitPay also offers the BitPay Card, which is a Mastercard prepaid debit card that can be loaded from the app. You can use this card for shopping at popular stores. Besides, it offers non-taxable cashback on eligible purchases.
How to Report Crypto Taxes (and Mobile Apps for Tax Reports)
The IRS and many other tax agencies across the globe require you to report any gains (or losses) made in the course of trading or investing in cryptocurrencies and non-fungible tokens. Fortunately, most of the crypto exchanges and wallet services we have discussed in this article provide reports about your transactions, including cryptocurrency sales and purchases that occurred in your account. You can use them to file accurate tax returns.
Gathering the data required to report cryptocurrencies on your tax return should be simple if all of your cryptocurrency transactions take place on a single exchange. But things can get more challenging if you use cryptocurrencies for transactions across a number of exchanges, digital wallets, and crypto credit cards. In that case, you will need to either track the transactions yourself or get reports from wherever they took place.
Fortunately, you can now simplify your crypto tax filing to the IRS, or your tax authority, using special tax apps that work smoothly with multiple platforms, unifying all your transaction information. Among the best tax apps to use are software programmes like TokenTax, CoinTracker, TaxAct Express, Taxfix, Taxdown, YNAB, TurboTax, QuickBooks, and H&R Block. Keep in mind that these apps may charge a fee.
Consequences of Not Paying Crypto Taxes
Simply put, failing to pay your crypto taxes will cost you more money when law enforcement agents find out. You will be sanctioned, fined, or possibly sent to prison. The government can forcefully seize your property.
Tax evasion and tax fraud are both federal offences in many countries. Even the IRS can penalise crypto tax evaders harshly. Depending on how serious the offence is, you might be fined up to 75% of the tax owed, up to $100,000 in penalties ($500,000 for businesses), or perhaps 5 years in jail.
Usually, long-term capital gains tax rates are applied to cryptocurrencies held for a long period of time. So, the amount you will have to file or pay depends on your country’s tax rules concerning this type of transaction.
Other than not using your cryptocurrency, there are no legal ways to avoid paying taxes on it. If the value of your cryptocurrency increases, you will ultimately have to pay taxes when you sell it, use it, convert it to fiat money, swap it, or trade it.
Generally, tax-free countries are those that do not require you to pay any tax for trading or investing in cryptocurrencies and those that will charge 0% rates under some terms and conditions. Based on this definition, countries and territories that can be classified as crypto-tax-free include Monaco, Seychelles, Puerto Rico, Malta, Vanuatu, Thailand, Switzerland, Singapore, and Germany.
Taxes are only due on cryptocurrency when a gain is realised, which can only happen when you sell, use, or trade it. The possession of a cryptocurrency is usually not taxable.
Unless you sell cryptocurrency, there is nothing to declare if you simply purchase it. Even if you haven't sold your cryptocurrency yet, you will probably need to report any earnings you received via staking, a hard fork, an airdrop, or any other method other than purchasing it.
Cryptocurrency is taxable in many countries, even though it has not been legalised in most of them. From the United States to the United Kingdom, India, and other parts of the world, earnings from holding, converting, or selling crypto incur capital gains tax or income tax at varying rates. Using the right crypto wallet, cards, and tax apps, which we have shown you in this article, you can optimise your cryptocurrency tax liabilities and file your refunds to the appropriate authorities without stress.