If you participate in the digital asset sector, whether trading, staking, buying, or selling, you may be wondering what affects your tax reports when it’s time to file. Varying regulations around the world, and even within various regions of countries, can make it a very confusing process. The reality is that many of the activities you take part in when interacting with cryptocurrency applications and exchanges are taxable events. With that being the case, it’s a good idea to understand what those events are, and what you can do that will be a tax-free event. That’s why we’ve created this guide to outline tax laws on crypto assets in various jurisdictions. We’ll break down both taxable and tax-free events for three major countries.
Cryptocurrency Taxes by Country
Below we’ve outlined the basic tax laws regarding crypto for the US, Canada, and the United Kingdom. Each country has differing tax brackets along with percentages for things such as capital gains, income, and dispositions. For countries not mentioned in this guide, it’s best to check with your government’s official tax laws, but it’s likely to be similar to one of the three below countries. Let’s start with the US.
Digital Asset Taxes in the United States of America
The US has less tax on digital assets than the UK or Canada. They also have less taxable events for capital gains on crypto assets than both those countries.
In the US, you only pay capital gains when selling crypto for fiat currency, swapping a crypto asset for another, or spending cryptocurrency on goods and services. Tax rates for US capital gains start at 10% for crypto. This rate goes up depending on your household income and marital status. The US allows you to give up to $17,000 in crypto, per person, tax-free. Doing this is a good way to reduce taxes within a household by giving crypto to a spouse, though you can also reduce tax overall by giving to any person or multiple people.
Income taxable crypto events in the US occur when you receive digital assets as payment, mining rewards, airdrops, hard forks, staking rewards, or referrals. This is ostensibly the same across all three countries featured. Generally speaking, if you’re earning crypto in some form, whether as payment or as a reward for staking, that’s income and will be taxed as such. People who day trade cryptocurrencies would be dealing with income rather than capital gains.
Crypto Taxes in Canada
In Canada, capital gains are paid on crypto when selling it for Canadian dollars (CAD), swapping digital assets for others, spending cryptocurrencies on goods and services, or gifting it to someone. The last taxable event for Canada is in stark contrast to the US’, which allows you to give up to $17k USD (over $20k CAD) to multiple people without any tax. Capital gains tax starts at a higher percentage in Canada too, at 15% compared to the 10% it starts at in the US.
The main difference between income tax on digital assets when comparing Canada to the US is tax rate variation. The rates vary depending on the province you live in and your overall household income. In contrast, you simply add your crypto income to your federal income tax report for the US. Canada is like the US for day trading, as it’s considered an income taxable event rather than a capital gains one.
Cryptocurrency Taxes in the United Kingdom
In the UK, you pay capital gains on all the same dispositions as you do in Canada. The main difference is that you’re allowed to give digital assets to your spouse in any amount (but an amount that doesn’t affect their personal capital gains allowance) without paying tax on that transaction. While not quite as beneficial as the US’ laws for giving crypto, it’s a nice option to have.
Capital gains tax starts at 10% for household incomes of up to £50,270 much like the US, and lower than Canada’s 15%. The UK tax only increases to 20% if you make over £150k, and that’s also the maximum tax rate.
The UK’s HM Revenue and Customs (HMRC) is the only federal tax agency in this guide that has fully defined tax guidance for decentralized finance (DeFi) transactions. The HMRC has determined that income tax will only apply on a return you receive from an activity. This could include rewards from staking, yield farming, lending, and more. HMRC will consider DeFi transactions income if:
- The return you receive has been agreed upon
- If your return is paid by the borrower/DeFi platform
- If your return is paid periodically throughout the period of lending/staking
Tax Free Crypto Transactions by Country
Now that we’ve outlined the taxable events for each of the three countries, it would be good to note the various tax-free digital asset transactions there are. Unless specified in brackets, these apply to all. They are:
- Buying Crypto with fiat
- Moving crypto between your own wallets
- Holding it after purchase
- Being gifted crypto (Canada), gifting crypto to spouse (UK), gifting crypto to anyone (US)
- Creating a DAO (Canada)
- Donating crypto to charity (US and UK)
- Creating an NFT (US)
If you do any of the above actions then it’s tax-free assuming you’re in that tax jurisdiction. For those in the US and UK, giving cryptocurrencies to others or a spouse, respectively, is a good way to reduce taxes in both countries. Unfortunately, it’s not an option in Canada.
What Happens If I Don’t Pay My Crypto Taxes?
Even with the knowledge of what you need to pay taxes on for digital assets, filing can be a stressful process. Crypto taxes can be doubly stressful compared to regular taxes, and certainly confusing. For those who participate in many DeFi activities, or make frequent cryptocurrency transactions, there is a lot of complexity to filing. Because of this, it can be tempting to just not report your crypto on your taxes at all, especially if you’re a smaller scale investor.
However, it’s a good idea to pay your digital asset taxes to avoid the obvious legal repercussions that could result if you don’t. If you don’t pay your crypto taxes you open yourself up to things such as fines, interest on money owed, and in extreme cases, jail time.
Closing Thoughts: Report Your Crypto Taxes
Regardless of if you’re in the green or red, you should report your crypto on your taxes every year. Not doing so can open you up to legal repercussions such as fines in the long-term, especially if you hit a big gain and are suddenly ready to cash out a large profit. While crypto taxes can be confusing, there are many resources even outside of this guide to help you figure them out.
If you are truly in doubt than seek out a tax professional to help you file your crypto taxes.