TL;DR

In most countries, cryptocurrencies are taxed. Trading, spending, or selling crypto is often a taxable event. To calculate taxes, you need to consider capital gains and losses. You may also have to pay income taxes if you accept crypto as payment.

Each jurisdiction is different, so make sure you consult a tax advisor. Tax authorities often work with crypto exchanges to track crypto transactions. If you try to avoid taxes, you could face financial penalties and even more severe penalties.

Introduction

If you are HODLing or trading, at some point you may have to pay crypto taxes. The exact amount varies between countries, but tax authorities generally treat crypto assets as capital assets. Paying the required taxes is a legal obligation, so you must do it properly.

In this article, we discuss some basic principles that apply to crypto taxation in general. As policy frameworks for cryptocurrency taxation vary by country, we always recommend consulting local tax experts.

Do I have to pay taxes when buying or selling crypto?

There is no absolute answer to this question. The tax will depend on your location, the length of time you have held crypto, the type of activity you engage in, and other factors. Generally, you may need to pay taxes or offset losses on selling, but not when buying.

Taxes on cryptocurrencies are not always simple. As a fairly new asset, tax authorities are still developing crypto policies. However, you are responsible for tracking taxable profits and losses and paying the correct amount of tax according to your country's policy framework.

What is a taxable event?

A taxable event is a transaction or activity that requires you to pay tax. This event is not universal. A taxable event in one country may not be recognized in another country. Typically, transactions involving the sale of commodities, investments, and other capital assets are taxable. Purchasing digital currency, such as Bitcoin or BNB with fiat currency is most likely not a taxable event. However, selling or trading crypto will likely be taxable.

A taxable event will provide a capital gain (profit) or capital loss. If an asset you own appreciates and you trade it at a profit, you have made a capital gain. If you trade or sell an asset at a loss, you have suffered a capital loss.

Again, the decision whether a capital gain is considered a taxable event depends on the local tax authority. You may be able to deduct capital losses from capital gains to reduce taxes. The overall tax amount mainly depends on the combination of the two. To help calculate it, taxpayers should pay attention to the date, cost basis (purchase price), sales value, and costs associated with all trading transactions.

What are taxable and non-taxable events?

Generally, taxable events include:

1. Selling cryptocurrency for fiat currency (e.g., USD, CAD, EUR, JPY, etc.).

2. Trade cryptocurrency to get another cryptocurrency (e.g., BTC for ETH).

3. Spending cryptocurrency. In jurisdictions including the US, UK, Canada and Australia, spending crypto directly for goods or services may incur taxes if you make a profit.

4. Receive cryptocurrency as a result of forking, airdrop, or mining.

In contrast, the following are events that are generally not considered taxable:

1. Purchase cryptocurrency with fiat currency (except when the purchase price is lower than the fair market value of the coins purchased).

2. Donate cryptocurrency to a tax-exempt organization.

3. Rewards cryptocurrency with certain limits.

4. Transfer cryptocurrency from one wallet you own to another wallet you own.

How are cryptocurrencies taxed?

Bitcoin and other official classifications of cryptocurrencies within a country will determine its taxation. Tax authorities generally consider crypto as a capital asset, not a currency. If your country has not published a specific crypto taxation policy, your crypto profits will be taxed based on its official designation (if any). Some jurisdictions take a much simpler approach. For example, Germany does not tax crypto held for more than a year. Malaysia, Portugal, and Singapore also have very liberal crypto tax rules.

Your Bitcoin or crypto income can also count towards income taxes. If you are a full-time employee, freelancer, or crypto trader who gets paid in crypto, you may be required to pay income tax on your crypto earnings. Again, income tax rates usually depend on the amount earned.

Within certain income thresholds, you may not pay taxes on your income. Typically, there are various income ranges. The higher the range, the higher the tax rate. If your main income comes from trading, find out whether you are subject to capital gains tax or income tax.

How do I calculate my taxes?

If you buy crypto, HODL it, then sell it, then your tax liability is fairly easy to calculate. Let's look at a simple US-based example. First, we need to know the capital gain or loss in US dollars. Here is the formula:

Fair market value - Cost basis = Capital Gain/Loss

Fair market value is the current spot price that would be found on an exchange, such as Binance. The cost basis is the initial price paid for the asset plus any fees.

Imagine you buy 2 BTC for $10,000 and then sell it 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 gain)

In the US, capital gains taxes depend on the total taxable amount, tax filing status, and length of time of holding the asset. If you hold crypto for more than a year, you will be subject to long-term capital gains tax.

The amount paid depends on your total taxable income. This figure includes your capital gains. If you already have taxable income of $50,000, then your total taxable income would be $90,000 including capital gains. Based on the Internal Revenue Service chart below, you will pay a capital gains tax rate of 15% on cryptocurrency profits.

If you trade regularly, your calculations will require more effort. The tax consequences of buying and selling fiat are easier to understand, but they become more complicated when trading one cryptocurrency for another. Let's imagine you have traded BNB and Ether (ETH). Here is your trading history:

In our example, trading BNB for ETH counts as a taxable event. So, you have to calculate capital gains and losses. Your capital gain is fair market value ($500) minus cost basis. However, which transactions do we use as a cost basis? Having previously purchased BNB at two different prices, you need to make a decision.

Accountants use two different ways to calculate it: First-in, First-Out (FIFO) and Last-In, First-Out (LIFO). FIFO is the standard for most countries, while LIFO is usually used only as an alternative method in the US. With FIFO, assets purchased first will be sold or traded first. In this case, we will sell 1 BNB purchased for $150 first.

Using FIFO, the cost basis for this taxable event is $150. The result is a capital gain of $350 payable based on our formula:

$500 (fair market value) - $150 (cost basis) = $350 (capital gain)

With LIFO, the most recently purchased assets will be sold or traded first. LIFO will instead use the purchase of 1 BNB for $300 as the cost basis. In this case, your capital gain would be $200.

$500 (fair market value) - $300 (cost basis) = $200 (capital gain)

You can deduct capital losses from capital gains to calculate the amount owed in a tax year. In most countries, short-term capital gains and losses (usually holdings of less than one year) are treated differently from long-term gains and losses.

How do tax authorities know about my cryptocurrency?

Tax authorities such as the IRS, ATO, CRA, HMRC and others track cryptocurrency transactions and enforce tax compliance. Major cryptocurrency exchanges are also cooperating with authorities.

Governments use data analysis tools, such as Chainanalysis to determine the use of cryptocurrencies. With enough information, they can associate blockchain transactions from regulated cryptocurrency exchanges with personal crypto wallets. This analysis even includes some of the layers removed from exchanges to combat tax evasion.

The IRS and other tax authorities also collaborate and share data with other government agencies, academic institutions, and international governments to share information regarding the use of cryptocurrencies.

What happens if I don't report my cryptocurrency taxes?

In most countries, tax authorities require you to file tax returns periodically. This applies even if your tax owed is zero or you require a refund. Failure to report can result in fees, penalties, interest, forfeiture of refunds, audits, and even jail time.

Binance API Tax Reporting Tool

Binance Tax Reporting Tool allows you to track your crypto activity. You can generate reports via the API and use them to ensure that you meet your jurisdiction's requirements. For more information, please read How to Get Tax Reports on Binance.

Closing

Managing taxes properly is important. That's why we recommend getting professional help in calculating your tax bill if you have any doubts. This may happen if you are already trading and not just investing. The tax implications of periodic trading are much more complicated. But most importantly, your situation for tax purposes depends largely on where you live. Make sure you use our information with that in mind.

Disclaimer

Binance does not provide tax or financial advice. Depending on the country's tax framework, when you trade commodities and the event results in a capital gain (or loss), you may have to pay taxes. The policy framework for taxation of cryptocurrencies differs from country to country. We therefore strongly recommend that you contact your personal tax advisor for further information regarding your personal tax situation. Selecting the correct tax jurisdiction applicable to you is your personal responsibility.