“Nice profits you got there, can we have some?” - every government ever.
Ah yes, taxes. One of life’s unavoidable little caveats. Not one of those caveats that’s impossible to avoid mind you, but given the amount of trouble you can find yourself in if you DON’T pay them… well, you might as well pay them.
Unfortunately, crypto is not immune to taxes. And once you start seeing some big profits come in, the government is going to want a slice as well. Each country has a slightly different way of doing it, but in the end, all roads lead to your government getting their slice.
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In the US, the IRS (Internal Revenue Service) has been cracking down on crypto taxes. They even added a question about crypto to the top of the 1040 tax form:
“At any time during 2024, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
If you check “no” when you should’ve checked “yes”, you’re in audit town.
In the US, If you sell or trade crypto, you’ll pay capital gains tax on the profit. Short-term gains (for assets held less than a year) are taxed at your regular income tax rate, while long-term gains (crypto held over a year) are taxed at a lower rate. Usually 0%, 15%, or 20%, depending on your income. A lot of people were enjoying a tax-free time, but in 2021, the IRS sued Coinbase to hand over records of users who had transacted more than $20,000 in crypto. This was the moment a lot of people who thought they were happily flying under the radar went, “Oh no…”
And you’re probably aware of all the hype around Trump promising to eliminate capital gains tax on crypto in the US, provided they’re ‘American made’, but that hasn’t happened just yet. And even if it does, it’s not a guarantee that it’ll be a good thing either.
Across the pond in UK, the HMRC (Her Majesty’s Revenue and Customs), has its own rules for crypto. Like the US, crypto is treated as property, but the tax rates are a bit different. In the UK, you only pay capital gains tax if your total gains for the year exceed the tax-free allowance (£3,000 in 2024). The tax rate is 10% for basic rate taxpayers and 20% for higher rate taxpayers.
Whereas in Germany, it’s a little more crypto friendly. Who knew? And they’re especially friendly when it comes to taxes. If you hold your crypto for more than a year in Germany, your gains are tax free. What a country! But if you sell before the one year mark, your profits are subject to capital gains tax.
And down under, the Australian Taxation Office (ATO) treats crypto as both an investment and a form of property. If you sell, trade, or spend your crypto, you pay capital gains tax on any profits you manage to make. But in an almost German play, you may be eligible for a 50% discount on your capital gains tax if you held for over a year.
Like anything, if you’re making money off it, the government wants to make money off it. And we all know a guy who swears you don’t need to claim anything and says things like “it’s all totally fine” and “don’t even worry about it”, but doing the right thing with your crypto at tax time is actually so easy now. You’re better off just doing the right thing and not getting in a whole heap of trouble.
So how do you avoid getting on the wrong side of the taxman?
Keep records of every transaction. This is all your buys, sells, trades, and earnings. And for any exchange worth its salt, this is usually built into their reporting that you can just export whenever you need to. Then there’s tools like CoinTracker or Koinly can help. If you have your own accountant, or are thinking of employing one (which is a good idea), make sure they’re crypto savvy.
And I get it, taxes aren’t the sexy or cool part of crypto, but they’re definitely one of the most important. Although now that I said that I’m wondering if there are any parts of crypto that are cool or sexy?
