In many countries, cryptocurrencies are subject to tax. Trading, spending or selling your crypto are often taxable events. To calculate your taxes, you will need to consider your capital gains and losses. You may also have to pay income taxes if you receive crypto as payment.
Every jurisdiction is different, so make sure you consult a tax advisor. Tax authorities frequently cooperate with crypto exchanges to track crypto transactions. If you attempt to evade tax, you can end up with financial penalties and even harsher punishments.
In this article, we'll cover some basic principles that apply to crypto taxation in general. Because the regulatory framework for the taxation of cryptocurrencies differs by country, we always recommend consulting a local tax professional.
Do I have to pay taxes when I buy or sell crypto?
There's no single answer to this question. Your taxes will depend on your location, how long you've held your crypto, the type of activity you're doing, and other factors. In general, you'll probably need to pay taxes or offset losses for selling but not when you buy.
Taxes in cryptocurrencies aren't always simple. As a fairly new asset, tax authorities are still developing crypto regulations. However, it's your responsibility to keep track of your taxable gains and losses and pay the right amount of tax, according to your country’s regulatory framework.
What’s a taxable event?
A taxable event will leave you with capital gains (profit) or capital losses. If an asset you're holding appreciates and you trade it at a profit, you've made capital gains. If you trade or sell that asset at a loss, you've incurred capital losses.
Again, whether capital gains are a taxable event depends on your local tax authority. You may be able to deduct capital losses from your capital gains to reduce your taxes. Your overall amount of tax depends largely on the sum of these together. To help calculate this, taxpayers should note the date, cost basis (purchase price), sale value, and fees associated with all trading transactions.
What are taxable and non-taxable events?
2. Trading cryptocurrency for another cryptocurrency (e.g., BTC for ETH).
3. Spending cryptocurrencies. In jurisdictions including the US, UK, Canada, and Australia, directly spending your crypto on goods or services can incur taxes if you made profits.
1. Buying cryptocurrency with fiat currency (except in cases where the purchase price is lower than the fair market value of the purchased coin).
3. Gifting cryptocurrency under a specific limit.
4. Transferring cryptocurrency from one wallet you own to another wallet you own.
How is cryptocurrency taxed?
Bitcoin and other cryptocurrencies' official classification within a country will determine how they're taxed. Tax authorities commonly count crypto as a capital asset and not a currency. If your country hasn't passed specific crypto taxation laws, expect your crypto profits to be taxed according to their official designation (if any). Some jurisdictions take a much simpler approach. Germany, for example, has no tax on crypto held for over a year. Malaysia, Portugal, and Singapore also have very liberal crypto tax rules.
Your Bitcoin or crypto income may also count as income tax. If you're a full-time employee, freelancer, or crypto trader paid in crypto, you’re likely liable to pay income tax on your crypto earnings. Again, the income tax rate usually depends on the amount you earn.
Under a certain income threshold, you might pay no tax on your income. You'll typically find different income brackets, with increasing higher brackets paying higher tax rates. If your primary income comes from trading, find out if you're subject to capital gains taxes or income tax.
How do I calculate my taxes?
If you've bought crypto, HODLed, and sold it later, your tax liability should be fairly easy to calculate. Let's look at a simplified, US-based example. First of all, we need to figure out our capital gains or losses in US dollars. Here's the formula:
Fair market value - Cost basis = Capital gain / Loss
Imagine you bought 2 BTC for $10,000 and sold them two years later for $30,000. You've now made $40,000 in capital gains:
$60,000 (fair market value) - $20,000 (cost basis) = $40,000 (capital gains)
In the USA, capital gains tax depends on your total taxable income, tax-filing status, and the amount of time you've held the asset. If you've kept your crypto for over a year, you're subject to long-term capital gains tax.
The amount you pay depends on your total taxable income. This figure includes your capital gains. If you already have $50,000 of taxable income, your total taxable income will be $90,000, including your capital gains. According to the Internal Revenue Service’s chart below, you'll pay a 15% capital gains tax rate on your cryptocurrency gains.
Less than $40,400
$40,401 - $445,850
Married filing jointly
Less than $80,800
$80,801 - $501,600
Married filing separately
Less than $40,400
$40,401 - $250,800
Head of household
Less than $54,100
$54,101 - $473,750
17 Feb 2021
Purchased 1 BNB for $150
21 Feb 2021
Purchased 1 BNB for $300
02 April 2021
Purchased 1 ETH for $2,000
11 April 2021
Trade 1 BNB (worth $500 on the spot market that day) for 0.24 ETH
In our example, trading your BNB for ETH counts as a taxable event, so you must calculate your capital gains and losses. Your capital gains are the fair market value ($500) minus the cost basis. But which transaction do we use as the cost basis? After purchasing BNB previously at two different prices, you need to make a decision.
Accountants use two different ways to calculate this: First-in, First-Out (FIFO) and Last-In, First-Out (LIFO). FIFO is the standard for most countries, while LIFO is typically only used as an alternative method in the U.S. With FIFO, the asset you purchased first is sold or traded first. In our case, we would first sell the 1 BNB purchased for $150.
Using FIFO, the cost basis for our taxable event is $150. This leaves us with $350 in capital gains to pay according to our formula:
$500 (fair market value) - $150 (cost basis) = $350 (capital gains)
With LIFO, the most recently purchased asset is sold or traded first. LIFO would instead use the purchase of 1 BNB for $300 as the cost basis. In this case, your capital gains would be $200.
$500 (fair market value) - $300 (cost basis) = $200 (capital gains)
You can deduct your capital losses from capital gains to calculate how much you owe in a tax year. In many countries, short-term capital gains and capital losses (typically holdings less than a year) are treated separately from long-term gains and losses.
How do tax authorities know about my cryptocurrency?
The IRS and other tax authorities also partner and share data with other governmental bodies, academic institutions, and international governments to share information about cryptocurrency usage.
What happens if I don’t file my cryptocurrency taxes?
In many countries, tax authorities require you to file your taxes regularly. This can be the case even if you owe zero taxes or need a refund. Failure to file can result in fees, penalties, interest, confiscated refunds, audits, and even jail time.
Binance API Tax Reporting Tool
Getting your taxes right is essential. That’s why we recommend getting professional help calculating your tax bill if you have any doubts. This may be the case if you’ve been trading and not just investing. The tax implications of regular trading are much more complicated. But most importantly, your situation for tax purposes is highly dependent on where you live. Make sure to use our information with that in mind.
Binance does not provide tax or financial advice. Depending on the country's tax framework, when you trade commodities and the event produces capital gains (or losses), you may have to pay taxes. The regulatory framework for taxation of cryptocurrencies differs from country to country, hence we strongly advise you to contact your personal tax advisor for further information about your personal tax circumstances. It is your personal responsibility to select the correct tax jurisdiction that applies to you.