If you’re active in the digital asset sector, whether trading, staking, buying, or selling, you may be wondering what affects your tax reports when that time of year comes around.
The reality is that almost everything 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 the basics of how those crypto taxes work, 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 four major jurisdictions. Let’s jump in.
Cryptocurrency Tax Basics By Country
Below we have the basic tax laws for crypto assets in the US, Canada, the United Kingdom, and Australia. Each country has differing tax bracket thresholds, 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 countries below.
The US has less tax on digital assets than the UK, Canada, or Australia. They also have less taxable events for capital gains on crypto assets than those countries.
In the US, you’ll pay capital gains tax 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, a pattern that repeats for all countries in this guide. You’ll also pay less tax on your crypto if you hold for more than a year thanks to something called long-term capital gains.
The US allows you to give up to $17,000 in digital assets, per person, tax-free. This is a good way to reduce taxes within a household by giving crypto to your spouse, though you can also reduce tax overall by giving to any person or multiple people of your choosing.
Income taxable crypto events in the US occur when you receive crypto assets as payment, mining rewards, airdrops, hard forks, staking rewards, or referrals. This is ostensibly the same across all the countries featured.
Generally, if you’re earning crypto in some form, whether as payment for services or as a reward for staking, that’s income and will be taxed as such in every country. People who day trade cryptocurrencies deal with income tax rather than capital gains.
In Canada, capital gains taxes are paid on crypto when you sell it for Canadian dollars (CAD), swap digital assets for others, spend cryptocurrencies on goods and services, or gift it to someone. The gifting of crypto being a 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. Whether the Canadian Revenue Agency (CRA) classifies your crypto income as capital gains or business income depends on whether:
- You conduct crypto activity for commercial reasons.
- You promote a product or service.
- You show that you intend to make a profit.
- Your crypto activities are regular or repetitive.
The CRA’s example of a business income for digital assets is an investor who buys and sells crypto on a regular basis and makes a profit of $40,000 through active trading of it.
In the UK, you’ll pay capital gains tax on all the same dispositions as you do in Canada. The main difference between the two is that in the UK you’re allowed to give digital assets to your spouse in any amount 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 as long as it doesn’t change the bracket your spouse is in.
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 HMRC is the only federal tax agency in this piece that has fully defined tax guidance for decentralized finance (DeFi) transactions. They have determined that income tax will only apply on a return you receive from an activity. This can 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
In Australia, you report gains and losses in your Income Tax Return and pay income tax on net gains. If you hold your crypto for at least a year and receive a 50% discount on those taxes. Australia is similar to Canada in that you also get taxed when you give crypto to someone, which isn’t the case in the US or UK. Also like Canada, you can receive a crypto gift without having to pay tax.
Capital gains tax in Australia starts at 0% if you make below $18k AUD, with it increasing above that threshold. The tax treatment of your crypto in Australia will typically depend on whether you’re seen as an individual investor or a trader making a regular income. There are different tax rules for each. It works similarly to the US and Canada, with different taxes being applied if you’re considered a “trader” vs an “investor” in Australia.
Are There Tax-Free Crypto Transactions?
Now that we’ve outlined the taxable events for four countries, it would be good to note the various tax free digital asset transactions there are. Unless specified in brackets, these apply to all the countries in this guide. 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)
Repercussions of Not Paying Crypto Taxes
Even if you now know what you need to pay taxes on for digital assets, actually filing can be a stressful process. Digital asset taxes can be doubly stressful compared to regular taxes, and is certainly more confusing.
For those participating in many DeFi activities, or making frequent cryptocurrency transactions, there is a lot of complexity to filing their taxes. This makes it tempting to just not report your crypto on your taxes at all, especially if you’re a smaller scale investor.
However, much like regular taxes, not filing your crypto taxes can have a range of repercussions including fines and even jail time.
Crypto taxes, much like traditional taxes, are a confusing process. Thankfully, federal tax bodies around the world have been starting to more clearly define the taxable events within the sector, helping provide clarity to those of us in it.
As digital assets become more and more mainstream, it will be interesting to see how taxation laws surrounding them change.