In many countries, trading, spending, and selling crypto are often taxable events. To calculate your taxes, you must consider your capital gains and losses. You may also have to pay income taxes on your crypto holdings if you receive crypto as payment.
Every jurisdiction is different, so make sure to consult a tax advisor to help you to calculate and understand your taxes. Crypto exchanges are typically obliged to cooperate with tax authorities to help them track crypto transactions. Anyone found guilty of tax evasion can be slapped with significant financial penalties and even harsher punishments.
If you HODL or trade crypto, you'll probably have to pay crypto taxes at some point. The exact percentage varies among countries, but generally, it's common for tax authorities to treat crypto assets as capital assets. Paying your designated taxes is a legal obligation, so there’s no room for error.
In this article, we'll cover some basic principles that apply to crypto taxation. Because the regulatory framework for the taxation of cryptocurrencies differs from one country to another, we recommend consulting a local tax professional.
Do I Have to Pay Taxes When I Buy or Sell Crypto?
There's no single right answer to this question. Your taxes will depend on your location, how long you've held your crypto, and the type of crypto activity you engage in, among other factors. As a general rule, you'll likely need to pay taxes or offset losses for selling — but not when you buy crypto.
Crypto taxes aren't very straightforward. As it is a fairly new asset, tax authorities are still developing regulations on crypto taxation. 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 is a transaction or activity on which you're required to pay taxes. These events aren’t universal — what’s taxable event in one country might not be in another. Typically, transactions involving the sale of commodities, investments, and other capital assets are taxable. Purchasing digital currencies like Bitcoin or BNB using fiat currency is unlikely to be a taxable event. However, selling or trading your crypto is likely to be taxed.
A taxable event will leave you with capital gains (profit) or capital losses. If an asset you're holding appreciates and you trade it for 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 taxable depends on your local tax authority. You may be able to deduct capital losses from your capital gains to reduce your taxes. Your overall tax depends largely on the combination of these factors. 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?
Taxable events may include:
Selling cryptocurrency for fiat currency (i.e., USD, CAD, EUR, JPY, etc).
Trading one cryptocurrency for another (e.g., BTC for ETH).
Spending cryptocurrencies. In certain jurisdictions, directly spending your crypto on goods or services can incur taxes if you make any profit doing so.
Receiving cryptocurrency as a result of mining, a fork, or an airdrop.
The following are generally not considered taxable events:
Buying cryptocurrency with fiat currency (except in cases where the purchase price is lower than the fair market value of the purchased coin).
Donating cryptocurrency to a tax-exempt organization.
Gifting cryptocurrency under a specific limit.
Transferring cryptocurrency from one wallet to another wallet, as long you own both.
How Is Cryptocurrency Taxed?
Bitcoin and other cryptocurrencies' official classification in a country will determine how they're taxed. In some countries, crypto may be counted and taxed as a capital asset. In other countries, the tax regime may be less stringent.
Your Bitcoin or other 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 how much you earn.
Under a certain income threshold, you might pay no taxes on your income. Typically, the greater the income bracket, the higher the income tax rates. If your primary income comes from trading crypto, you must determine whether you're subject to capital gains tax 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 use a hypothetical country, X, as an example. We must first calculate our capital gains or losses (in US dollars). The formula is as follows:
Fair market value - cost basis = Capital gain / loss
The fair market value is the current spot price you'd find on an exchange like Binance. The cost basis is the original price you paid for the asset plus any fees.
Imagine you bought 2 BTC for $10,000 each and sold them two years later for $30,000 each. You've now made $40,000 in capital gains:
$60,000 (fair market value) - $20,000 (cost basis) = $40,000 (capital gains)
Your capital gains tax can depend on your total taxable income, tax-filing status, and the amount of time you've held the asset in question. For example, if you've kept held crypto for over a year, you might be subject to long-term capital gains tax.
The amount you must pay depends on your total taxable income, which includes your capital gains. Continuing from the aforementioned example, if you already have $50,000 of taxable income, your total taxable income including your capital gains will be $90,000. According to the example tax chart below, you'd have to pay a 15% capital gains tax on your cryptocurrency gains.
If you trade regularly, your calculations will require more work. The tax consequences of fiat purchases and sales are relatively easy to understand, but it gets more complicated when trading one cryptocurrency for another. Let's imagine you've been trading BNB and Ether (ETH), with the following being your trading history:
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 having purchased BNB at two different prices, you must decide.
Accountants use two different methods 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 countries where it is accepted.
With FIFO, the asset you purchased first is sold or traded first. In this case, you would first sell the 1 BNB you purchased for $150. Using FIFO, the cost basis for this taxable event is $150. This means you must pay $350 in capital gains, according to the following formula:
$500 (fair market value) - $150 (cost basis) = $350 (capital gains)
With LIFO, the most recently purchased asset is sold or traded first. As such, LIFO would 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 your capital gains to calculate how much you owe in a tax year. In many countries, short-term capital gains and losses (typically from holdings that are under a year old) are treated separately from long-term gains and losses.
How Do Tax Authorities Know About My Crypto Holdings?
Tax authorities in various jurisdictions have begun to track cryptocurrency transactions and enforce tax compliance. Large cryptocurrency exchanges are also obligated to cooperate with authorities.
Governments use data analytics tools such as Chainanalysis to track cryptocurrency activity. With enough information, they can tie blockchain transactions on regulated cryptocurrency exchanges to personal crypto wallets. These analytics even involve removing multiple layers from exchanges to combat tax evasion.
Some 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 are entitled to a refund. Failure to file can result in fees, penalties, interest, confiscated refunds, audits, and even jail time.
What Is Binance Tax?
Binance Tax is a free service that automatically generates a tax report for the user, based on their crypto transactions.
Currently, Binance Tax retrieves only Binance transaction data, which users can edit manually. Future versions of this service will allow users to add transactions by uploading their own CSV files and possibly, offer connectivity to other third-party exchanges or portals via API.
What Is the Binance API Reporting Tool?
The Binance API reporting tool allows you to keep track of your crypto activity. You can generate a report via API and use it to ensure you fulfill the tax requirements of your jurisdiction. For more information, please read How to Obtain Tax Reporting on Binance.
Calculating your taxes correctly and paying them on time are essential life skills. That’s why we recommend engaging a professional tax advisor to ensure you don’t make any mistakes. This may be the case if you’ve been trading and not just investing. The tax implications of regular trading are much more complicated. Bear in mind that your specific tax requirements are highly dependent on the applicable regulations where you live.
Disclaimer: 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.